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Is SITI - B&T Group S.p.A.'s (BIT:SITI) P/E Ratio Really That Good?

Simply Wall St

This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to SITI - B&T Group S.p.A.'s (BIT:SITI), to help you decide if the stock is worth further research. Looking at earnings over the last twelve months, SITI - B&T Group has a P/E ratio of 10.54. That corresponds to an earnings yield of approximately 9.5%.

View our latest analysis for SITI - B&T Group

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 SITI - B&T Group:

P/E of 10.54 = EUR2.68 ÷ EUR0.25 (Based on the trailing twelve months to June 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 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 SITI - B&T Group'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 SITI - B&T Group has a lower P/E than the average (17.1) P/E for companies in the machinery industry.

BIT:SITI Price Estimation Relative to Market, January 25th 2020

Its relatively low P/E ratio indicates that SITI - B&T Group shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with SITI - B&T Group, it's quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or selling.

How Growth Rates Impact P/E Ratios

Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. That means unless the share price falls, the P/E will increase in a few years. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.

SITI - B&T Group shrunk earnings per share by 43% over the last year. And it has shrunk its earnings per share by 22% per year over the last three years. This might lead to low expectations.

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. 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 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.

How Does SITI - B&T Group's Debt Impact Its P/E Ratio?

SITI - B&T Group has net debt worth a very significant 186% of its market capitalization. This is a relatively high level of debt, so the stock probably deserves a relatively low P/E ratio. Keep that in mind when comparing it to other companies.

The Bottom Line On SITI - B&T Group's P/E Ratio

SITI - B&T Group has a P/E of 10.5. That's below the average in the IT market, which is 18.7. When you consider that the company has significant debt, and didn't grow EPS last year, it isn't surprising that the market has muted expectations.

When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.

You might be able to find a better buy than SITI - B&T Group. 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.