A Sliding Share Price Has Us Looking At Bureau Veritas SA's (EPA:BVI) P/E Ratio
Unfortunately for some shareholders, the Bureau Veritas (EPA:BVI) share price has dived 31% in the last thirty days. Even longer term holders have taken a real hit with the stock declining 19% in the last year.
Assuming nothing else has changed, a lower share price makes a stock more attractive to potential buyers. In the long term, share prices tend to follow earnings per share, but in the short term prices bounce around in response to short term factors (which are not always obvious). So, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. Perhaps the simplest way to get a read on investors' expectations of a business is to look at its Price to Earnings Ratio (PE Ratio). A high P/E ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.
Check out our latest analysis for Bureau Veritas
How Does Bureau Veritas's P/E Ratio Compare To Its Peers?
Bureau Veritas's P/E of 21.15 indicates some degree of optimism towards the stock. The image below shows that Bureau Veritas has a higher P/E than the average (11.4) P/E for companies in the professional services industry.
That means that the market expects Bureau Veritas will outperform other companies in its industry. The market is optimistic about the future, but that doesn't guarantee future growth. So investors should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. And in that case, the P/E ratio itself will drop rather quickly. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
Bureau Veritas increased earnings per share by 9.0% last year. And earnings per share have improved by 4.3% annually, over the last five years.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. Thus, the metric does not reflect cash or debt held by the company. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).
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.
Bureau Veritas's Balance Sheet
Bureau Veritas has net debt worth 23% of its market capitalization. It would probably deserve a higher P/E ratio if it was net cash, since it would have more options for growth.
The Verdict On Bureau Veritas's P/E Ratio
Bureau Veritas has a P/E of 21.2. That's higher than the average in its market, which is 14.2. With debt at prudent levels and improving earnings, it's fair to say the market expects steady progress in the future. What can be absolutely certain is that the market has become significantly less optimistic about Bureau Veritas over the last month, with the P/E ratio falling from 30.7 back then to 21.2 today. For those who don't like to trade against momentum, that could be a warning sign, but a contrarian investor might want to take a closer look.
When the market is wrong about a stock, it gives savvy investors an opportunity. 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 visual report on analyst forecasts could hold the key to an excellent investment decision.
You might be able to find a better buy than Bureau Veritas. 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.
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