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Is Koninklijke BAM Groep nv’s (AMS:BAMNB) High P/E Ratio A Problem For Investors?

Kristin Rankin

This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll look at Koninklijke BAM Groep nv’s (AMS:BAMNB) P/E ratio and reflect on what it tells us about the company’s share price. Koninklijke BAM Groep has a price to earnings ratio of 26.98, based on the last twelve months. That corresponds to an earnings yield of approximately 3.7%.

See our latest analysis for Koninklijke BAM Groep

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 Koninklijke BAM Groep:

P/E of 26.98 = €2.52 ÷ €0.093 (Based on the trailing twelve months to June 2018.)

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 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.

How Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the ‘E’ increases, over time. That means even if the current P/E is high, it will reduce over time if the share price stays flat. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.

Koninklijke BAM Groep shrunk earnings per share by 44% over the last year. But it has grown its earnings per share by 13% per year over the last five years.

How Does Koninklijke BAM Groep’s P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that Koninklijke BAM Groep has a higher P/E than the average (16.5) P/E for companies in the construction industry.

ENXTAM:BAMNB PE PEG Gauge January 3rd 19

That means that the market expects Koninklijke BAM Groep will outperform other companies in its industry. Clearly the market expects growth, but it isn’t guaranteed. So further research is always essential. I often monitor director buying and selling.

Remember: P/E Ratios Don’t Consider The Balance Sheet

The ‘Price’ in P/E reflects the market capitalization of the company. Thus, the metric does not reflect cash or debt held by the company. 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 Koninklijke BAM Groep’s P/E?

The extra options and safety that comes with Koninklijke BAM Groep’s €88m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.

The Bottom Line On Koninklijke BAM Groep’s P/E Ratio

Koninklijke BAM Groep trades on a P/E ratio of 27, which is above the NL market average of 15.2. The recent drop in earnings per share would make some investors cautious, but the net cash position means the company has time to improve: and the high P/E suggests the market thinks it will.

Investors have an opportunity when market expectations about a stock are wrong. People often underestimate remarkable growth — so investors can make money when fast growth is not fully appreciated. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

You might be able to find a better buy than Koninklijke BAM Groep. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.