Yahoo Finance Is Bovis Homes Group PLC's (LON:BVS) High P/E Ratio A Problem For Investors?
Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at Bovis Homes Group PLC's (LON:BVS) P/E ratio and reflect on what it tells us about the company's share price. Bovis Homes Group has a price to earnings ratio of 10.16, based on the last twelve months. That is equivalent to an earnings yield of about 9.8%.
Check out our latest analysis for Bovis Homes Group
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 Bovis Homes Group:
P/E of 10.16 = £10.33 ÷ £1.02 (Based on the trailing twelve months to December 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each £1 of company 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.'
How Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. And in that case, the P/E ratio itself will drop rather quickly. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Notably, Bovis Homes Group grew EPS by a whopping 49% in the last year. And earnings per share have improved by 18% annually, over the last five years. I'd therefore be a little surprised if its P/E ratio was not relatively high.
How Does Bovis Homes Group's P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. The image below shows that Bovis Homes Group has a P/E ratio that is roughly in line with the consumer durables industry average (9.9).
That indicates that the market expects Bovis Homes Group will perform roughly in line with other companies in its industry. So if Bovis Homes Group actually outperforms its peers going forward, that should be a positive for the share price. I would further inform my view by checking insider buying and selling., among other things.
Remember: P/E Ratios Don't Consider The Balance Sheet
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. 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.
So What Does Bovis Homes Group's Balance Sheet Tell Us?
Bovis Homes Group has net cash of UK£127m. 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 Bovis Homes Group's P/E Ratio
Bovis Homes Group trades on a P/E ratio of 10.2, which is below the GB market average of 16.4. The net cash position gives plenty of options to the business, and the recent improvement in EPS is good to see. The relatively low P/E ratio implies the market is pessimistic. Because analysts are predicting more growth in the future, one might have expected to see a higher P/E ratio. You can taker closer look at the fundamentals, here.
Investors should be looking to buy stocks that the market is wrong about. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine.' 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: Bovis Homes Group 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).
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.
