Yahoo Finance Do You Know What Brickworks Limited’s (ASX:BKW) P/E Ratio Means?
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The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll show how you can use Brickworks Limited’s (ASX:BKW) P/E ratio to inform your assessment of the investment opportunity. Brickworks has a P/E ratio of 14.6, based on the last twelve months. That is equivalent to an earnings yield of about 6.8%.
See our latest analysis for Brickworks
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Brickworks:
P/E of 14.6 = A$17.15 ÷ A$1.17 (Based on the year to July 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each A$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
P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the ‘E’ increases, over time. That means unless the share price increases, the P/E will reduce in a few years. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Brickworks saw earnings per share decrease by 6.0% last year. But EPS is up 18% over the last 5 years.
How Does Brickworks’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. The image below shows that Brickworks has a P/E ratio that is roughly in line with the basic materials industry average (15.5).
Its P/E ratio suggests that Brickworks shareholders think that in the future it will perform about the same as other companies in its industry classification. If the company has better than average prospects, then the market might be underestimating it. Checking factors such as the tenure of the board and management could help you form your own view on if that will happen.
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. 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.
Is Debt Impacting Brickworks’s P/E?
Brickworks’s net debt is 12% of its market cap. That’s enough debt to impact the P/E ratio a little; so keep it in mind if you’re comparing it to companies without debt.
The Bottom Line On Brickworks’s P/E Ratio
Brickworks’s P/E is 14.6 which is about average (15.6) in the AU market. With modest debt, and a lack of recent growth, it would seem the market is expecting improvement in earnings.
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 they key to an excellent investment decision.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
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.
