Yahoo Finance Do You Like Brisbane Broncos Limited (ASX:BBL) At This 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 show how you can use Brisbane Broncos Limited's (ASX:BBL) P/E ratio to inform your assessment of the investment opportunity. Looking at earnings over the last twelve months, Brisbane Broncos has a P/E ratio of 19.68. That means that at current prices, buyers pay A$19.68 for every A$1 in trailing yearly profits.
See our latest analysis for Brisbane Broncos
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Brisbane Broncos:
P/E of 19.68 = A$0.41 ÷ A$0.021 (Based on the trailing twelve months to December 2018.)
Is A High Price-to-Earnings Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. 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.
How Growth Rates Impact P/E Ratios
Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. That means unless the share price falls, the P/E will increase in a few years. Then, a higher P/E might scare off shareholders, pushing the share price down.
Brisbane Broncos saw earnings per share decrease by 25% last year. And EPS is down 6.9% a year, over the last 3 years. This growth rate might warrant a low P/E ratio.
How Does Brisbane Broncos's P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. If you look at the image below, you can see Brisbane Broncos has a lower P/E than the average (21.8) in the entertainment industry classification.
This suggests that market participants think Brisbane Broncos 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.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
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. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).
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 Brisbane Broncos's Balance Sheet Tell Us?
Brisbane Broncos has net cash of AU$12m. This is fairly high at 25% of its market capitalization. That might mean balance sheet strength is important to the business, but should also help push the P/E a bit higher than it would otherwise be.
The Bottom Line On Brisbane Broncos's P/E Ratio
Brisbane Broncos trades on a P/E ratio of 19.7, which is above the AU market average of 16.2. Falling earnings per share is probably keeping traditional value investors away, but the relatively strong balance sheet will allow the company time to invest in growth. Clearly, the high P/E indicates shareholders think it will!
Investors should be looking to buy stocks that the market is wrong about. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. We don't have analyst forecasts, but shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.
But note: Brisbane Broncos 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.
