Yahoo Finance Don't Sell Fresnillo Plc (LON:FRES) Before You Read This
Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll look at Fresnillo Plc's (LON:FRES) P/E ratio and reflect on what it tells us about the company's share price. What is Fresnillo's P/E ratio? Well, based on the last twelve months it is 32.24. That corresponds to an earnings yield of approximately 3.1%.
See our latest analysis for Fresnillo
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share (in the reporting currency) ÷ Earnings per Share (EPS)
Or for Fresnillo:
P/E of 32.24 = USD8.31 (Note: this is the share price in the reporting currency, namely, USD ) ÷ USD0.26 (Based on the year to June 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. That isn't a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business's prospects, relative to stocks with a lower P/E.
Does Fresnillo Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company. The image below shows that Fresnillo has a significantly higher P/E than the average (9.3) P/E for companies in the metals and mining industry.
That means that the market expects Fresnillo will outperform other companies in its industry. Shareholders are clearly optimistic, but the future is always uncertain. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the 'E' will be higher. That means unless the share price increases, the P/E will reduce in a few years. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Fresnillo's earnings per share fell by 61% in the last twelve months. But it has grown its earnings per share by 5.7% per year over the last three years. And it has shrunk its earnings per share by 3.4% per year over the last five years. This growth rate might warrant a below average P/E ratio.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don't forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. In theory, a company can lower its future P/E ratio by using cash or debt to invest in 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.
How Does Fresnillo's Debt Impact Its P/E Ratio?
Fresnillo's net debt is 7.2% of its market cap. So it doesn't have as many options as it would with net cash, but its debt would not have much of an impact on its P/E ratio.
The Bottom Line On Fresnillo's P/E Ratio
Fresnillo trades on a P/E ratio of 32.2, which is above its market average of 18.3. With some debt but no EPS growth last year, the market has high expectations of future profits.
When the market is wrong about a stock, it gives savvy investors an opportunity. 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 visual report on analyst forecasts could hold the key to an excellent investment decision.
Of course you might be able to find a better stock than Fresnillo. So you may wish to see this free collection of other companies that have grown earnings strongly.
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.
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.
