Does Mountfield Group Plc (LON:MOGP) Have A Good P/E Ratio?

Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!

The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to Mountfield Group Plc's (LON:MOGP), to help you decide if the stock is worth further research. Based on the last twelve months, Mountfield Group's P/E ratio is 6.89. That corresponds to an earnings yield of approximately 15%.

View our latest analysis for Mountfield Group

How Do You Calculate A P/E Ratio?

The formula for price to earnings is:

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

Or for Mountfield Group:

P/E of 6.89 = £0.018 ÷ £0.0027 (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 is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.

Does Mountfield 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. We can see in the image below that the average P/E (8.2) for companies in the construction industry is higher than Mountfield Group's P/E.

Its relatively low P/E ratio indicates that Mountfield Group shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Mountfield Group, it's quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or selling.

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 unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.

Mountfield Group increased earnings per share by 5.8% last year. And its annual EPS growth rate over 5 years is 4.3%.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

The 'Price' in P/E reflects the market capitalization of the company. 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).

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.

How Does Mountfield Group's Debt Impact Its P/E Ratio?

Mountfield Group has net cash of UK£68k. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.

The Verdict On Mountfield Group's P/E Ratio

Mountfield Group trades on a P/E ratio of 6.9, which is below the GB market average of 16.5. EPS was up modestly better over the last twelve months. And the net cash position gives the company many options. So it's strange that the low P/E indicates low expectations.

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. Although we don't have analyst forecasts, shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.

But note: Mountfield 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).

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.