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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 St. Galler Kantonalbank AG's (VTX:SGKN), to help you decide if the stock is worth further research. What is St. Galler Kantonalbank's P/E ratio? Well, based on the last twelve months it is 15.39. In other words, at today's prices, investors are paying CHF15.39 for every CHF1 in prior year profit.
View our latest analysis for St. Galler Kantonalbank
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for St. Galler Kantonalbank:
P/E of 15.39 = CHF438.5 ÷ CHF28.49 (Based on the trailing twelve months to December 2018.)
Is A High P/E Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each CHF1 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 Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. And in that case, the P/E ratio itself will drop rather quickly. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
St. Galler Kantonalbank's earnings per share were pretty steady over the last year. But EPS is up 7.8% over the last 5 years.
Does St. Galler Kantonalbank Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that St. Galler Kantonalbank has a P/E ratio that is roughly in line with the banks industry average (16).
That indicates that the market expects St. Galler Kantonalbank will perform roughly in line with other companies in its industry. So if St. Galler Kantonalbank actually outperforms its peers going forward, that should be a positive for the share price. Further research into factors such asmanagement tenure, could help you form your own view on whether that is likely.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
The 'Price' in P/E reflects the market capitalization of the company. 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).