In This Article:
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at SpareBank 1 Ringerike Hadeland's (OB:RING) P/E ratio and reflect on what it tells us about the company's share price. SpareBank 1 Ringerike Hadeland has a price to earnings ratio of 8.17, based on the last twelve months. That is equivalent to an earnings yield of about 12.2%.
View our latest analysis for SpareBank 1 Ringerike Hadeland
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for SpareBank 1 Ringerike Hadeland:
P/E of 8.17 = NOK220.00 ÷ NOK26.92 (Based on the trailing twelve months to September 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each NOK1 of company 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.
How Does SpareBank 1 Ringerike Hadeland's P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. You can see in the image below that the average P/E (8.3) for companies in the banks industry is roughly the same as SpareBank 1 Ringerike Hadeland's P/E.
That indicates that the market expects SpareBank 1 Ringerike Hadeland will perform roughly in line with other companies in its industry. The company could surprise by performing better than average, in the future. I would further inform my view by checking insider buying and selling., among other things.
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.
It's great to see that SpareBank 1 Ringerike Hadeland grew EPS by 23% in the last year. And its annual EPS growth rate over 5 years is 5.4%. This could arguably justify a relatively high P/E ratio.
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. 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.