Do You Like TBC Bank Group PLC (LON:TBCG) At This P/E Ratio?

Simply Wall St

Fri, Jun 7, 2019, 3:01 AM

This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to TBC Bank Group PLC's (LON:TBCG), to help you decide if the stock is worth further research. What is TBC Bank Group's P/E ratio? Well, based on the last twelve months it is 6.13. In other words, at today's prices, investors are paying £6.13 for every £1 in prior year profit.

View our latest analysis for TBC Bank Group

How Do You Calculate A P/E Ratio?

The formula for P/E is:

Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)

Or for TBC Bank Group:

P/E of 6.13 = GEL53.48 (Note: this is the share price in the reporting currency, namely, GEL ) ÷ GEL8.72 (Based on the year to March 2019.)

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

Probably the most important factor in determining what P/E a company trades on is the earnings growth. When earnings grow, the 'E' increases, over time. That means unless the share price increases, the P/E will reduce in a few years. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

TBC Bank Group increased earnings per share by a whopping 30% last year. And earnings per share have improved by 22% annually, over the last five years. I'd therefore be a little surprised if its P/E ratio was not relatively high.

Does TBC Bank Group Have A Relatively High Or Low P/E For Its Industry?

One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. The image below shows that TBC Bank Group has a lower P/E than the average (9.1) P/E for companies in the banks industry.

LSE:TBCG Price Estimation Relative to Market, June 7th 2019

Its relatively low P/E ratio indicates that TBC Bank Group shareholders think it will struggle to do as well as other companies in its industry classification. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.

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

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. That means it doesn't take debt or cash into account. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on 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).

TBC Bank Group's Balance Sheet

Net debt totals 53% of TBC Bank Group's market cap. This is a reasonably significant level of debt -- all else being equal you'd expect a much lower P/E than if it had net cash.

The Bottom Line On TBC Bank Group's P/E Ratio

TBC Bank Group trades on a P/E ratio of 6.1, which is below the GB market average of 16.1. 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.

When the market is wrong about a stock, it gives savvy investors an opportunity. 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.' So this free visual report on analyst forecasts could hold the key to an excellent investment decision.

But note: TBC Bank Group 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.

Terms and Privacy Policy

Your Privacy Choices

Utah Privacy Notice

More Info