U.S. Markets close in 26 mins

# Read This Before You Buy Société BIC SA (EPA:BB) Because Of Its P/E Ratio

Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. To keep it practical, we'll show how Société BIC SA's (EPA:BB) P/E ratio could help you assess the value on offer. What is Société BIC's P/E ratio? Well, based on the last twelve months it is 13.94. That means that at current prices, buyers pay €13.94 for every €1 in trailing yearly profits.

Check out our latest analysis for Société BIC

### How Do You Calculate A P/E Ratio?

The formula for P/E is:

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

Or for Société BIC:

P/E of 13.94 = €62.50 ÷ €4.48 (Based on the trailing twelve months to September 2019.)

### Is A High Price-to-Earnings Ratio Good?

The higher the P/E ratio, the higher the price tag of a business, relative to its trailing 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 Does Société BIC'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. The image below shows that Société BIC has a lower P/E than the average (16.4) P/E for companies in the commercial services industry.

Société BIC's P/E tells us that market participants think it will not fare as well as its peers in the same industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. You should delve deeper. I like to check if company insiders have been buying or selling.

### How Growth Rates Impact P/E Ratios

When earnings fall, the 'E' decreases, over time. That means unless the share price falls, the P/E will increase in a few years. Then, a higher P/E might scare off shareholders, pushing the share price down.

Société BIC's earnings per share fell by 11% in the last twelve months. And EPS is down 4.0% a year, over the last 5 years. This growth rate might warrant a below average P/E ratio.

### A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. That means it doesn't take debt or cash into account. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.

Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.

### How Does Société BIC's Debt Impact Its P/E Ratio?

Société BIC has net cash of €162m. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.

### The Bottom Line On Société BIC's P/E Ratio

Société BIC has a P/E of 13.9. That's below the average in the FR market, which is 18.0. Falling earnings per share are likely to be keeping potential buyers away, the relatively strong balance sheet will allow the company time to invest in growth. If it achieves that, then there's real potential that the low P/E could eventually indicate undervaluation.

Investors should be looking to buy stocks that the market is wrong about. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. 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.

You might be able to find a better buy than Société BIC. 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).

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.