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Here's What Britvic plc's (LON:BVIC) P/E Is Telling Us

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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 Britvic plc's (LON:BVIC) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Britvic's P/E ratio is 29.62. That means that at current prices, buyers pay £29.62 for every £1 in trailing yearly profits.

See our latest analysis for Britvic

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 Britvic:

P/E of 29.62 = £9.06 ÷ £0.31 (Based on the year to September 2019.)

Is A High P/E Ratio Good?

The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. That isn't a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business's prospects, relative to stocks with a lower P/E.

Does Britvic 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. As you can see below, Britvic has a higher P/E than the average company (23.5) in the beverage industry.

LSE:BVIC Price Estimation Relative to Market, December 31st 2019
LSE:BVIC Price Estimation Relative to Market, December 31st 2019

Its relatively high P/E ratio indicates that Britvic shareholders think it will perform better than other companies in its industry classification. Shareholders are clearly optimistic, but the future is always uncertain. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

How Growth Rates Impact P/E Ratios

When earnings fall, the 'E' decreases, over time. That means even if the current P/E is low, it will increase over time if the share price stays flat. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.

Britvic saw earnings per share decrease by 31% last year. And EPS is down 3.5% a year, over the last 5 years. This growth rate might warrant a below average P/E ratio.

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.

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 Britvic's Balance Sheet Tell Us?

Britvic has net debt equal to 25% of its market cap. You'd want to be aware of this fact, but it doesn't bother us.

The Bottom Line On Britvic's P/E Ratio

Britvic's P/E is 29.6 which is above average (18.3) in its market. With modest debt but no EPS growth in the last year, it's fair to say the P/E implies some optimism about future earnings, from the market.

Investors have an opportunity when market expectations about a stock are wrong. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. 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: Britvic 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.