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Why Prosegur Compañía de Seguridad, S.A.'s (BME:PSG) High P/E Ratio Isn't Necessarily A Bad Thing

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 Prosegur Compañía de Seguridad, S.A.'s (BME:PSG), to help you decide if the stock is worth further research. What is Prosegur Compañía de Seguridad's P/E ratio? Well, based on the last twelve months it is 29.13. That is equivalent to an earnings yield of about 3.4%.

View our latest analysis for Prosegur Compañía de Seguridad

How Do I Calculate A Price To Earnings Ratio?

The formula for P/E is:

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

Or for Prosegur Compañía de Seguridad:

P/E of 29.13 = €3.68 ÷ €0.13 (Based on the trailing twelve months to September 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 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.

Does Prosegur Compañía de Seguridad Have A Relatively High Or Low P/E For Its Industry?

One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. As you can see below, Prosegur Compañía de Seguridad has a higher P/E than the average company (16.8) in the commercial services industry.

BME:PSG Price Estimation Relative to Market, November 24th 2019

Prosegur Compañía de Seguridad'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 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 even if the current P/E is low, it will increase over time if the share price stays flat. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.

Prosegur Compañía de Seguridad's earnings per share fell by 50% in the last twelve months. And over the longer term (5 years) earnings per share have decreased 14% annually. This growth rate might warrant a below average P/E ratio.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

Don't forget that the P/E ratio considers market capitalization. That means it doesn't take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

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.

Prosegur Compañía de Seguridad's Balance Sheet

Net debt is 33% of Prosegur Compañía de Seguridad's market cap. While it's worth keeping this in mind, it isn't a worry.

The Verdict On Prosegur Compañía de Seguridad's P/E Ratio

Prosegur Compañía de Seguridad has a P/E of 29.1. That's higher than the average in its market, which is 16.9. With a bit of debt, but a lack of recent growth, it's safe to say the market is expecting improved profit performance from the company, in the next few years.

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 visual report on analyst forecasts could hold the key to an excellent investment decision.

Of course you might be able to find a better stock than Prosegur Compañía de Seguridad. 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.