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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 show how you can use St. Galler Kantonalbank AG's (VTX:SGKN) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, St. Galler Kantonalbank's P/E ratio is 15.39. That corresponds to an earnings yield of approximately 6.5%.
Check out our latest analysis for St. Galler Kantonalbank
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 St. Galler Kantonalbank:
P/E of 15.39 = CHF438.5 ÷ CHF28.49 (Based on the trailing twelve months to December 2018.)
Is A High Price-to-Earnings 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
Earnings growth rates have a big influence on P/E ratios. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.
St. Galler Kantonalbank's earnings per share were pretty steady over the last year. But over the longer term (5 years) earnings per share have increased by 7.8%.
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. You can see in the image below that the average P/E (16) for companies in the banks industry is roughly the same as St. Galler Kantonalbank's P/E.
St. Galler Kantonalbank's P/E tells us that market participants think its prospects are roughly in line with its industry. If the company has better than average prospects, then the market might be underestimating it. Checking factors such as the tenure of the board and management could help you form your own view on if that will happen.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
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.