【please enter a username matching the regular expression】Is Begbies Traynor Group plc's (LON:BEG) High P/E Ratio A Problem For Investors?

This please enter a username matching the regular expressionarticle is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to Begbies Traynor Group plc's (

LON:BEG

), to help you decide if the stock is worth further research. Based on the last twelve months,

Begbies Traynor Group's P/E ratio is 26.59

. That corresponds to an earnings yield of approximately 3.8%.

View our latest analysis for Begbies Traynor Group

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 Begbies Traynor Group:

P/E of 26.59 = £0.845 ÷ £0.032 (Based on the year to October 2019.)

(Note: the above calculation results may not be precise due to rounding.)

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 is not a good or a bad thing

per se

, but a high P/E does imply buyers are optimistic about the future.

Does Begbies Traynor Group Have A Relatively High Or Low P/E For Its Industry?

We can get an indication of market expectations by looking at the P/E ratio. As you can see below, Begbies Traynor Group has a higher P/E than the average company (20.5) in the professional services industry.

AIM:BEG Price Estimation Relative to Market, March 8th 2020

Its relatively high P/E ratio indicates that Begbies Traynor Group shareholders think it will perform better than other companies in its industry classification. Clearly the market expects growth, but it isn't guaranteed. So investors should delve deeper. I like to check

if company insiders have been buying or selling

.

How Growth Rates Impact P/E Ratios

Probably the most important factor in determining what P/E a company trades on is the earnings growth. Earnings growth means that in the future the 'E' will be higher. That means unless the share price increases, the P/E will reduce in a few years. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

In the last year, Begbies Traynor Group grew EPS like Taylor Swift grew her fan base back in 2010; the 239% gain was both fast and well deserved. Even better, EPS is up 80% per year over three years. So we'd absolutely expect it to have a relatively high P/E ratio.

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. So it won't reflect the advantage of cash, or disadvantage of debt. 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).

Story continues

Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).

Begbies Traynor Group's Balance Sheet

Begbies Traynor Group has net debt worth just 2.1% of its market capitalization. The market might award it a higher P/E ratio if it had net cash, but its unlikely this low level of net borrowing is having a big impact on the P/E multiple.

The Bottom Line On Begbies Traynor Group's P/E Ratio

Begbies Traynor Group's P/E is 26.6 which is above average (15.9) in its market. Its debt levels do not imperil its balance sheet and its EPS growth is very healthy indeed. So on this analysis a high P/E ratio seems reasonable.

Investors have an opportunity when market expectations about a stock are wrong. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. So this

free

report on the analyst consensus forecasts

could help you make a

master move

on this stock.

But note:

Begbies Traynor Group 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).

If you spot an error that warrants correction, please contact the editor at

[email protected]

. 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.

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. Thank you for reading.

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