Bemis Company Inc (NYSE:BMS) is trading with a trailing P/E of 22.2x, which is higher than the industry average of 22.1x. While this makes BMS appear like a stock to avoid or sell if you own it, you might change your mind after I explain the assumptions behind the P/E ratio. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for. View our latest analysis for Bemis Company
What you need to know about the P/E ratio
P/E is often used for relative valuation since earnings power is a chief driver of investment value. By comparing a stock’s price per share to its earnings per share, we are able to see how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for BMS
Price-Earnings Ratio = Price per share ÷ Earnings per share
BMS Price-Earnings Ratio = $46.92 ÷ $2.117 = 22.2x
On its own, the P/E ratio doesn’t tell you much; however, it becomes extremely useful when you compare it with other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to BMS, such as company lifetime and products sold. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. At 22.2x, BMS’s P/E is higher than its industry peers (22.1x). This implies that investors are overvaluing each dollar of BMS’s earnings. Therefore, according to this analysis, BMS is an over-priced stock.
Assumptions to be aware of
However, before you rush out to sell your BMS shares, it is important to note that this conclusion is based on two key assumptions. The first is that our “similar companies” are actually similar to BMS, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with BMS, then its P/E would naturally be lower than its peers, as investors would value those with lower risk at a higher price. The second assumption that must hold true is that the stocks we are comparing BMS to are fairly valued by the market. If this is violated, BMS’s P/E may be lower than its peers as they are actually overvalued by investors.
To help readers see pass 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.