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Do You Know What Close Brothers Group plc’s (LON:CBG) P/E Ratio Means?

This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll show how you can use Close Brothers Group plc’s (LON:CBG) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Close Brothers Group’s P/E ratio is 11.17. In other words, at today’s prices, investors are paying £11.17 for every £1 in prior year profit.

View our latest analysis for Close Brothers Group

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How Do I Calculate A Price To Earnings Ratio?

The formula for P/E is:

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Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)

Or for Close Brothers Group:

P/E of 11.17 = £15.21 ÷ £1.36 (Based on the year to July 2018.)

Is A High Price-to-Earnings 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

P/E ratios primarily reflect market expectations around earnings growth rates. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.

Close Brothers Group’s earnings per share grew by -4.6% in the last twelve months. And its annual EPS growth rate over 5 years is 9.6%.

How Does Close Brothers Group’s P/E Ratio Compare To Its Peers?

We can get an indication of market expectations by looking at the P/E ratio. The image below shows that Close Brothers Group has a lower P/E than the average (19.3) P/E for companies in the capital markets industry.

LSE:CBG PE PEG Gauge January 13th 19
LSE:CBG PE PEG Gauge January 13th 19

This suggests that market participants think Close Brothers Group will underperform other companies in its industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. You should delve deeper. I like to check if company insiders have been buying or selling.

Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits

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.

Is Debt Impacting Close Brothers Group’s P/E?

Net debt totals 44% of Close Brothers Group’s market cap. This is enough debt that you’d have to make some adjustments before using the P/E ratio to compare it to a company with net cash.

The Bottom Line On Close Brothers Group’s P/E Ratio

Close Brothers Group’s P/E is 11.2 which is below average (15.6) in the GB market. The company hasn’t stretched its balance sheet, and earnings are improving. If you believe growth will continue – or even increase – then the low P/E may signify opportunity.

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 visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.

Of course you might be able to find a better stock than Close Brothers Group. So you may wish to see this free collection of other companies that have grown earnings strongly.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.