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Should You Be Tempted To Sell Brunello Cucinelli S.p.A. (BIT:BC) Because Of Its P/E Ratio?

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The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at Brunello Cucinelli S.p.A.'s (BIT:BC) P/E ratio and reflect on what it tells us about the company's share price. Brunello Cucinelli has a P/E ratio of 41.69, based on the last twelve months. That is equivalent to an earnings yield of about 2.4%.

See our latest analysis for Brunello Cucinelli

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 Brunello Cucinelli:

P/E of 41.69 = €31.08 ÷ €0.75 (Based on the year to December 2018.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that buyers have to pay a higher price for each €1 the company has earned over the last year. 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. Earnings growth means that in the future the 'E' will be higher. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. Then, a lower P/E should attract more buyers, pushing the share price up.

Brunello Cucinelli's earnings per share were pretty steady over the last year. But over the longer term (5 years) earnings per share have increased by 11%.

Does Brunello Cucinelli Have A Relatively High Or Low P/E For Its Industry?

The P/E ratio essentially measures market expectations of a company. The image below shows that Brunello Cucinelli has a higher P/E than the average (15.8) P/E for companies in the luxury industry.

BIT:BC Price Estimation Relative to Market, May 9th 2019

Brunello Cucinelli's P/E tells us that market participants think the company will perform better than its industry peers, going forward. The market is optimistic about the future, but that doesn't guarantee future growth. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

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. 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 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 Brunello Cucinelli's Debt Impact Its P/E Ratio?

Net debt totals just 1.1% of Brunello Cucinelli's market cap. So it doesn't have as many options as it would with net cash, but its debt would not have much of an impact on its P/E ratio.

The Bottom Line On Brunello Cucinelli's P/E Ratio

Brunello Cucinelli's P/E is 41.7 which is above average (16.2) in the IT market. With some debt but no EPS growth last year, the market has high expectations of future profits.

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.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

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.

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. Thank you for reading.