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Should We Worry About B&M European Value Retail S.A.'s (LON:BME) P/E Ratio?

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Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll look at B&M European Value Retail S.A.'s (LON:BME) P/E ratio and reflect on what it tells us about the company's share price. Based on the last twelve months, B&M European Value Retail's P/E ratio is 17.66. That is equivalent to an earnings yield of about 5.7%.

Check out our latest analysis for B&M European Value Retail

How Do I Calculate A Price To Earnings Ratio?

The formula for price to earnings is:

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

Or for B&M European Value Retail:

P/E of 17.66 = £3.62 ÷ £0.21 (Based on the trailing twelve months to March 2019.)

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

Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. Earnings growth means that in the future the 'E' will be higher. That means even if the current P/E is high, it will reduce over time if the share price stays flat. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

Most would be impressed by B&M European Value Retail earnings growth of 10% in the last year. And earnings per share have improved by 18% annually, over the last three years. So one might expect an above average P/E ratio.

Does B&M European Value Retail 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 B&M European Value Retail has a higher P/E than the average (15.6) P/E for companies in the multiline retail industry.

LSE:BME Price Estimation Relative to Market, May 29th 2019
LSE:BME Price Estimation Relative to Market, May 29th 2019

Its relatively high P/E ratio indicates that B&M European Value Retail shareholders think it will perform better than other companies in its industry classification. Shareholders are clearly optimistic, but the future is always uncertain. So investors 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

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. 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.

Is Debt Impacting B&M European Value Retail's P/E?

B&M European Value Retail's net debt is 17% of its market cap. It would probably deserve a higher P/E ratio if it was net cash, since it would have more options for growth.

The Bottom Line On B&M European Value Retail's P/E Ratio

B&M European Value Retail has a P/E of 17.7. That's higher than the average in the GB market, which is 16.4. While the company does use modest debt, its recent earnings growth is very good. So on this analysis it seems reasonable that its P/E ratio is above average.

Investors should be looking to buy stocks that the market is wrong about. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. 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: B&M European Value Retail 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.