This article is written for those who want to get better at using price to earnings ratios (P/E ratios). To keep it practical, we'll show how Mediobanca Banca di Credito Finanziario S.p.A.'s (BIT:MB) P/E ratio could help you assess the value on offer. What is Mediobanca Banca di Credito Finanziario's P/E ratio? Well, based on the last twelve months it is 9.17. That means that at current prices, buyers pay €9.17 for every €1 in trailing yearly profits.
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How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Mediobanca Banca di Credito Finanziario:
P/E of 9.17 = €8.7 ÷ €0.95 (Based on the year to March 2019.)
Is A High P/E Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.'
How Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means unless the share price increases, the P/E will reduce in a few years. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Mediobanca Banca di Credito Finanziario's earnings per share were pretty steady over the last year. But EPS is up 35% over the last 5 years.
How Does Mediobanca Banca di Credito Finanziario's P/E Ratio Compare To Its Peers?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. As you can see below Mediobanca Banca di Credito Finanziario has a P/E ratio that is fairly close for the average for the banks industry, which is 8.8.
Its P/E ratio suggests that Mediobanca Banca di Credito Finanziario shareholders think that in the future it will perform about the same as other companies in its industry classification. So if Mediobanca Banca di Credito Finanziario actually outperforms its peers going forward, that should be a positive for the share price. I inform my view byby checking management tenure and remuneration, among other things.
Remember: P/E Ratios Don't Consider The Balance Sheet
Don't forget that the P/E ratio considers market capitalization. So it won't reflect the advantage of cash, or disadvantage of debt. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).
How Does Mediobanca Banca di Credito Finanziario's Debt Impact Its P/E Ratio?
Mediobanca Banca di Credito Finanziario has net debt worth a very significant 260% of its market capitalization. If you want to compare its P/E ratio to other companies, you must keep in mind that these debt levels would usually warrant a relatively low P/E.
The Bottom Line On Mediobanca Banca di Credito Finanziario's P/E Ratio
Mediobanca Banca di Credito Finanziario's P/E is 9.2 which is below average (15.8) in the IT market. It's good to see EPS growth in the last 12 months, but the debt on the balance sheet might be muting expectations.
Investors should be looking to buy stocks that the market is wrong about. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine.' So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.
But note: Mediobanca Banca di Credito Finanziario 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).
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.
If you spot an error that warrants correction, please contact the editor at email@example.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. Thank you for reading.