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Read This Before You Buy Boral Limited (ASX:BLD) Because Of Its P/E Ratio

This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll look at Boral Limited’s (ASX:BLD) P/E ratio and reflect on what it tells us about the company’s share price. Based on the last twelve months, Boral’s P/E ratio is 13.29. That corresponds to an earnings yield of approximately 7.5%.

View our latest analysis for Boral

How Do You Calculate A P/E Ratio?

The formula for P/E is:

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

Or for Boral:

P/E of 13.29 = A$4.88 ÷ A$0.37 (Based on the year to June 2018.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that buyers have to pay a higher price for each A$1 the company has earned over the last year. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.

How Growth Rates Impact P/E Ratios

Companies that shrink earnings per share quickly will rapidly decrease the ‘E’ in the equation. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. A higher P/E should indicate the stock is expensive relative to others — and that may encourage shareholders to sell.

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Boral increased earnings per share by a whopping 52% last year. And earnings per share have improved by 42% annually, over the last five years. So we’d generally expect it to have a relatively high P/E ratio. In contrast, EPS has decreased by 5.1%, annually, over 3 years.

How Does Boral’s P/E Ratio Compare To Its Peers?

We can get an indication of market expectations by looking at the P/E ratio. We can see in the image below that the average P/E (15.1) for companies in the basic materials industry is higher than Boral’s P/E.

ASX:BLD PE PEG Gauge January 28th 19
ASX:BLD PE PEG Gauge January 28th 19

Boral’s P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with Boral, it’s quite possible it could surprise on the upside. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.

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. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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.

How Does Boral’s Debt Impact Its P/E Ratio?

Boral’s net debt is 43% of its 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 Verdict On Boral’s P/E Ratio

Boral trades on a P/E ratio of 13.3, which is below the AU market average of 15.2. The EPS growth last year was strong, and debt levels are quite reasonable. If it continues to grow, then the current low P/E may prove to be unjustified. Because analysts are predicting more growth in the future, one might have expected to see a higher P/E ratio. You can taker closer look at the fundamentals, here.

Investors have an opportunity when market expectations about a stock are wrong. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

Of course you might be able to find a better stock than Boral. 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.