In This Article:
Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll show how you can use Clínica Baviera, S.A.'s (BME:CBAV) P/E ratio to inform your assessment of the investment opportunity. What is Clínica Baviera's P/E ratio? Well, based on the last twelve months it is 19.43. That corresponds to an earnings yield of approximately 5.1%.
View our latest analysis for Clínica Baviera
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 Clínica Baviera:
P/E of 19.43 = €14.3 ÷ €0.74 (Based on the year to June 2019.)
Is A High Price-to-Earnings Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. 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.'
Does Clínica Baviera Have A Relatively High Or Low P/E For Its Industry?
We can get an indication of market expectations by looking at the P/E ratio. If you look at the image below, you can see Clínica Baviera has a lower P/E than the average (23.7) in the healthcare industry classification.
Clínica Baviera's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with Clínica Baviera, it's quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Clínica Baviera maintained roughly steady earnings over the last twelve months. But EPS is up 33% over the last 5 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. That means it doesn't take debt or cash into account. 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.