Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll show how you can use SpareBank 1 BV's (OB:SBVG) P/E ratio to inform your assessment of the investment opportunity. What is SpareBank 1 BV's P/E ratio? Well, based on the last twelve months it is 6.69. That corresponds to an earnings yield of approximately 15%.
View our latest analysis for SpareBank 1 BV
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 BV:
P/E of 6.69 = NOK37.8 ÷ NOK5.65 (Based on the trailing twelve months to March 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each NOK1 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
Earnings growth rates have a big influence on P/E ratios. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
It's nice to see that SpareBank 1 BV grew EPS by a stonking 29% in the last year. And earnings per share have improved by 130% annually, over the last three years. With that performance, I would expect it to have an above average P/E ratio. Unfortunately, earnings per share are down 16% a year, over 5 years.
How Does SpareBank 1 BV's P/E Ratio Compare To Its Peers?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. We can see in the image below that the average P/E (8.5) for companies in the banks industry is higher than SpareBank 1 BV's P/E.
SpareBank 1 BV's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Many investors like to buy stocks when the market is pessimistic about their prospects. You should delve deeper. I like to check if company insiders have been buying or selling.
Remember: P/E Ratios Don't Consider The Balance Sheet
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).