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Why Mediobanca Banca di Credito Finanziario S.p.A.'s (BIT:MB) High P/E Ratio Isn't Necessarily A Bad Thing

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Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll look at Mediobanca Banca di Credito Finanziario S.p.A.'s (BIT:MB) P/E ratio and reflect on what it tells us about the company's share price. Mediobanca Banca di Credito Finanziario has a P/E ratio of 10.02, based on the last twelve months. In other words, at today's prices, investors are paying €10.02 for every €1 in prior year profit.

Check out our latest analysis for Mediobanca Banca di Credito Finanziario

How Do I Calculate A Price To Earnings Ratio?

The formula for price to earnings is:

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

Or for Mediobanca Banca di Credito Finanziario:

P/E of 10.02 = EUR9.75 ÷ EUR0.97 (Based on the trailing twelve months to September 2019.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that buyers have to pay a higher price for each EUR1 the company has earned over the last year. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.

Does Mediobanca Banca di Credito Finanziario Have A Relatively High Or Low P/E For Its Industry?

The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that Mediobanca Banca di Credito Finanziario has a higher P/E than the average (8.9) P/E for companies in the banks industry.

BIT:MB Price Estimation Relative to Market, January 20th 2020
BIT:MB Price Estimation Relative to Market, January 20th 2020

That means that the market expects Mediobanca Banca di Credito Finanziario will outperform other companies in its industry. Clearly the market expects growth, but it isn't guaranteed. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. When earnings grow, the 'E' increases, over time. And in that case, the P/E ratio itself will drop rather quickly. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Mediobanca Banca di Credito Finanziario saw earnings per share improve by -3.6% last year. And earnings per share have improved by 13% annually, over the last five years.

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. In other words, it does not consider any debt or cash that the company may have on the balance sheet. In theory, a company can lower its future P/E ratio by using cash or debt to invest in 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.

Mediobanca Banca di Credito Finanziario's Balance Sheet

Mediobanca Banca di Credito Finanziario's net debt is considerable, at 210% of its market cap. This level of debt justifies a relatively low P/E, so remain cognizant of the debt, if you're comparing it to other stocks.

The Verdict On Mediobanca Banca di Credito Finanziario's P/E Ratio

Mediobanca Banca di Credito Finanziario trades on a P/E ratio of 10.0, which is below the IT market average of 18.7. The meaningful debt load is probably contributing to low expectations, even though it has improved earnings recently.

When the market is wrong about a stock, it gives savvy investors an opportunity. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

Of course you might be able to find a better stock than Mediobanca Banca di Credito Finanziario. So you may wish to see this free collection of other companies that have grown earnings strongly.

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.