Yahoo Finanza Do You Know What Prim, S.A.'s (BME:PRM) P/E Ratio Means?
Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. To keep it practical, we'll show how Prim, S.A.'s (BME:PRM) P/E ratio could help you assess the value on offer. What is Prim's P/E ratio? Well, based on the last twelve months it is 13.69. That is equivalent to an earnings yield of about 7.3%.
See our latest analysis for Prim
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Prim:
P/E of 13.69 = €8.900 ÷ €0.650 (Based on the year to December 2019.)
(Note: the above calculation results may not be precise due to rounding.)
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. 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 Does Prim'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. The image below shows that Prim has a lower P/E than the average (39.7) P/E for companies in the medical equipment industry.
Prim'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 Prim, 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
When earnings fall, the 'E' decreases, over time. 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.
Prim's earnings per share fell by 20% in the last twelve months. But it has grown its earnings per share by 2.2% per year over the last five years. And EPS is down 6.0% a year, over the last 3 years. This could justify a low P/E.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don't forget that the P/E ratio considers market capitalization. That means it doesn't take debt or cash into account. 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 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.
Is Debt Impacting Prim's P/E?
Prim has net cash of €3.5m. 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 Prim's P/E Ratio
Prim has a P/E of 13.7. That's around the same as the average in the ES market, which is 14.6. While the absence of growth in the last year is probably causing a degree of pessimism, the relatively strong balance sheet will allow the company to weather a storm; so it isn't very surprising to see that it has a P/E ratio close to the market average.
When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. Although we don't have analyst forecasts shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.
Of course you might be able to find a better stock than Prim. So you may wish to see this free collection of other companies that have grown earnings strongly.
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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.
