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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll show how you can use Biesse S.p.A.'s (BIT:BSS) P/E ratio to inform your assessment of the investment opportunity. Biesse has a P/E ratio of 12.82, based on the last twelve months. That means that at current prices, buyers pay €12.82 for every €1 in trailing yearly profits.
Check out our latest analysis for Biesse
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 Biesse:
P/E of 12.82 = €19.84 ÷ €1.55 (Based on the trailing twelve months 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 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
Earnings growth rates have a big influence on P/E ratios. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. And in that case, the P/E ratio itself will drop rather quickly. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Most would be impressed by Biesse earnings growth of 22% in the last year. And its annual EPS growth rate over 5 years is 45%. So one might expect an above average P/E ratio.
Does Biesse 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. You can see in the image below that the average P/E (13) for companies in the machinery industry is roughly the same as Biesse's P/E.
Biesse's P/E tells us that market participants think its prospects are roughly in line with its industry. If the company has better than average prospects, then the market might be underestimating it. I inform my view byby checking management tenure and remuneration, among other things.
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. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).
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.