Yahoo Finance Is Barratt Developments PLC's (LON:BDEV) P/E Ratio Really That Good?
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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). To keep it practical, we'll show how Barratt Developments PLC's (LON:BDEV) P/E ratio could help you assess the value on offer. Barratt Developments has a price to earnings ratio of 8.11, based on the last twelve months. That is equivalent to an earnings yield of about 12%.
See our latest analysis for Barratt Developments
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 Barratt Developments:
P/E of 8.11 = £5.85 ÷ £0.72 (Based on the year 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 necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
How Growth Rates Impact P/E Ratios
Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. 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. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
It's great to see that Barratt Developments grew EPS by 15% in the last year. And its annual EPS growth rate over 5 years is 39%. So one might expect an above average P/E ratio.
Does Barratt Developments Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that Barratt Developments has a lower P/E than the average (10.2) P/E for companies in the consumer durables industry.
Barratt Developments'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 Barratt Developments, it's quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
Remember: P/E Ratios Don't Consider The Balance Sheet
The 'Price' in P/E reflects the market capitalization of the company. Thus, the metric does not reflect cash or debt held by the company. 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.
While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.
So What Does Barratt Developments's Balance Sheet Tell Us?
Since Barratt Developments holds net cash of UK£379m, it can spend on growth, justifying a higher P/E ratio than otherwise.
The Verdict On Barratt Developments's P/E Ratio
Barratt Developments has a P/E of 8.1. That's below the average in the GB market, which is 16.3. It grew its EPS nicely over the last year, and the healthy balance sheet implies there is more potential for growth. The relatively low P/E ratio implies the market is pessimistic.
Investors should be looking to buy stocks that the market is wrong about. 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. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
You might be able to find a better buy than Barratt Developments. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
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.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Thank you for reading.
