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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). To keep it practical, we'll show how B3 Consulting Group AB (publ)'s (STO:B3) P/E ratio could help you assess the value on offer. Based on the last twelve months, B3 Consulting Group's P/E ratio is 21.28. That means that at current prices, buyers pay SEK21.28 for every SEK1 in trailing yearly profits.
Check out our latest analysis for B3 Consulting Group
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for B3 Consulting Group:
P/E of 21.28 = SEK67 ÷ SEK3.15 (Based on the year to December 2018.)
Is A High P/E Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. That isn't necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the 'E' will be lower. 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.
B3 Consulting Group shrunk earnings per share by 4.4% last year. And over the longer term (3 years) earnings per share have decreased 4.5% annually. So you wouldn't expect a very high P/E.
How Does B3 Consulting Group's P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. You can see in the image below that the average P/E (18.3) for companies in the it industry is lower than B3 Consulting Group's P/E.
Its relatively high P/E ratio indicates that B3 Consulting Group shareholders think it will perform better than other companies in its industry classification. 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.
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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.