Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll apply a basic P/E ratio analysis to Biuro Inwestycji Kapitalowych S.A.'s (WSE:BIK), to help you decide if the stock is worth further research. Biuro Inwestycji Kapitalowych has a P/E ratio of 58.99, based on the last twelve months. That corresponds to an earnings yield of approximately 1.7%.
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How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Biuro Inwestycji Kapitalowych:
P/E of 58.99 = PLN18.64 ÷ PLN0.32 (Based on the year to December 2018.)
Is A High P/E Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each PLN1 of company earnings. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the 'E' will be lower. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
Biuro Inwestycji Kapitalowych's earnings per share fell by 71% in the last twelve months. And over the longer term (5 years) earnings per share have decreased 32% annually. This might lead to muted expectations.
How Does Biuro Inwestycji Kapitalowych's P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. As you can see below, Biuro Inwestycji Kapitalowych has a much higher P/E than the average company (8.8) in the real estate industry.
Biuro Inwestycji Kapitalowych's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Clearly the market expects growth, but it isn't guaranteed. So investors should delve deeper. I like to check if company insiders have been buying or selling.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
Don't forget that the P/E ratio considers market capitalization. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.
So What Does Biuro Inwestycji Kapitalowych's Balance Sheet Tell Us?
Net debt totals a substantial 140% of Biuro Inwestycji Kapitalowych's market cap. 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 Verdict On Biuro Inwestycji Kapitalowych's P/E Ratio
With a P/E ratio of 59, Biuro Inwestycji Kapitalowych is expected to grow earnings very strongly in the years to come. With meaningful debt and a lack of recent earnings growth, the market has high expectations that the business will earn more in the future.
Investors should be looking to buy stocks that the market is wrong about. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. We don't have analyst forecasts, but shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.
But note: Biuro Inwestycji Kapitalowych 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 firstname.lastname@example.org. 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.