U.S. Markets closed

What Does Briscoe Group Limited's (NZSE:BGP) P/E Ratio Tell You?

Simply Wall St

This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll show how you can use Briscoe Group Limited's (NZSE:BGP) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Briscoe Group's P/E ratio is 13.80. That means that at current prices, buyers pay NZ$13.80 for every NZ$1 in trailing yearly profits.

See our latest analysis for Briscoe Group

How Do You Calculate A P/E Ratio?

The formula for P/E is:

Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)

Or for Briscoe Group:

P/E of 13.80 = NZ$3.88 ÷ NZ$0.28 (Based on the trailing twelve months to July 2019.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio implies that investors pay a higher price for the earning power of the business. That isn't necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.

Does Briscoe Group Have A Relatively High Or Low P/E For Its Industry?

The P/E ratio indicates whether the market has higher or lower expectations of a company. You can see in the image below that the average P/E (13.1) for companies in the specialty retail industry is roughly the same as Briscoe Group's P/E.

NZSE:BGP Price Estimation Relative to Market, December 31st 2019

Its P/E ratio suggests that Briscoe Group shareholders think that in the future it will perform about the same as other companies in its industry classification. The company could surprise by performing better than average, in the future. Further research into factors such as insider buying and selling, could help you form your own view on whether that is likely.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the 'E' will be higher. That means even if the current P/E is high, it will reduce over time if the share price stays flat. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

Briscoe Group had pretty flat EPS growth in the last year. But it has grown its earnings per share by 10% per year over the last five years.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

The 'Price' in P/E reflects the market capitalization of the company. That means it doesn't take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.

Is Debt Impacting Briscoe Group's P/E?

Since Briscoe Group holds net cash of NZ$56m, it can spend on growth, justifying a higher P/E ratio than otherwise.

The Bottom Line On Briscoe Group's P/E Ratio

Briscoe Group's P/E is 13.8 which is below average (19.5) in the NZ market. Recent earnings growth wasn't bad. And the net cash position gives the company many options. So it's strange that the low P/E indicates low expectations.

Investors have an opportunity when market expectations about a stock are wrong. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.

But note: Briscoe Group may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.