In This Article:
Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll look at Banca Farmafactoring S.p.A.'s (BIT:BFF) P/E ratio and reflect on what it tells us about the company's share price. Banca Farmafactoring has a P/E ratio of 8.2, based on the last twelve months. That means that at current prices, buyers pay €8.2 for every €1 in trailing yearly profits.
Check out our latest analysis for Banca Farmafactoring
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 Banca Farmafactoring:
P/E of 8.2 = €4.44 ÷ €0.54 (Based on the trailing twelve months to June 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.'
How Does Banca Farmafactoring's P/E Ratio Compare To Its Peers?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. We can see in the image below that the average P/E (18.2) for companies in the diversified financial industry is higher than Banca Farmafactoring's P/E.
This suggests that market participants think Banca Farmafactoring will underperform other companies in its industry. Many investors like to buy stocks when the market is pessimistic about their prospects. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. That means unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.
Banca Farmafactoring saw earnings per share decrease by 3.6% last year. But it has grown its earnings per share by 13% per year over the last five years.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
The 'Price' in P/E reflects the market capitalization of the company. 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.