The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll show how you can use P/F Bakkafrost’s (OB:BAKKA) P/E ratio to inform your assessment of the investment opportunity. Looking at earnings over the last twelve months, P/F Bakkafrost has a P/E ratio of 42.06. That corresponds to an earnings yield of approximately 2.4%.
How Do I Calculate P/F Bakkafrost’s Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)
Or for P/F Bakkafrost:
P/E of 42.06 = NOK492.88 (Note: this is the share price in the reporting currency, namely, DKK ) ÷ NOK11.72 (Based on the trailing twelve months to September 2019.)
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. 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 P/F Bakkafrost’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. As you can see below, P/F Bakkafrost has a higher P/E than the average company (25.8) in the food industry.
P/F Bakkafrost’s P/E tells us that market participants think the company will perform better than its industry peers, going forward. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
Companies that shrink earnings per share quickly will rapidly decrease the ‘E’ in the equation. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
P/F Bakkafrost’s earnings per share fell by 40% in the last twelve months. And it has shrunk its earnings per share by 20% per year over the last three years. This might lead to low expectations.
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. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.
Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.
P/F Bakkafrost’s Balance Sheet
P/F Bakkafrost has net cash of ø1.3b. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.
The Verdict On P/F Bakkafrost’s P/E Ratio
P/F Bakkafrost has a P/E of 42.1. That’s higher than the average in its market, which is 14.4. Falling earnings per share is probably keeping traditional value investors away, but the healthy balance sheet means the company retains potential for future growth. If fails to eventuate, the current high P/E could prove to be temporary, as the share price falls.
Investors should be looking to buy stocks that the market is wrong about. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.
But note: P/F Bakkafrost may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.