Despite Its High P/E Ratio, Is Bank für Tirol und Vorarlberg Aktiengesellschaft (VIE:BTS) Still Undervalued?

Simply Wall St

Tue, May 28, 2019, 4:11 AM

This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). To keep it practical, we'll show how Bank für Tirol und Vorarlberg Aktiengesellschaft's (VIE:BTS) P/E ratio could help you assess the value on offer. Bank für Tirol und Vorarlberg has a price to earnings ratio of 8.33, based on the last twelve months. In other words, at today's prices, investors are paying €8.33 for every €1 in prior year profit.

View our latest analysis for Bank für Tirol und Vorarlberg

How Do You Calculate A P/E Ratio?

The formula for P/E is:

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

Or for Bank für Tirol und Vorarlberg:

P/E of 8.33 = €27.6 ÷ €3.31 (Based on the trailing twelve months to December 2018.)

Is A High P/E Ratio Good?

A higher P/E ratio means that buyers have to pay a higher price for each €1 the company has earned over the last year. 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

When earnings fall, the 'E' decreases, over time. That means unless the share price falls, the P/E will increase in a few years. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.

Bank für Tirol und Vorarlberg increased earnings per share by a whopping 33% last year. And it has bolstered its earnings per share by 2.5% per year 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 15%, annually, over 3 years.

How Does Bank für Tirol und Vorarlberg's P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that Bank für Tirol und Vorarlberg has a P/E ratio that is roughly in line with the banks industry average (8.3).

WBAG:BTS Price Estimation Relative to Market, May 28th 2019

That indicates that the market expects Bank für Tirol und Vorarlberg will perform roughly in line with other companies in its industry. If the company has better than average prospects, then the market might be underestimating it. I inform my view byby checking management tenure and remuneration, among other things.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

Don't forget that the P/E ratio considers market capitalization. That means it doesn't take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

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).

Bank für Tirol und Vorarlberg's Balance Sheet

Bank für Tirol und Vorarlberg has net debt worth a very significant 300% of its market capitalization. If you want to compare its P/E ratio to other companies, you must keep in mind that these debt levels would usually warrant a relatively low P/E.

The Verdict On Bank für Tirol und Vorarlberg's P/E Ratio

Bank für Tirol und Vorarlberg trades on a P/E ratio of 8.3, which is below the AT market average of 14.6. The company has a meaningful amount of debt on the balance sheet, but that should not eclipse the solid earnings growth. If the company can continue to grow earnings, then the current P/E may be unjustifiably low.

Investors should be looking to buy stocks that the market is wrong about. 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.' Although we don't have analyst forecasts, you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.

But note: Bank für Tirol und Vorarlberg 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.

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