In This Article:
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 Bar Harbor Bankshares's (NYSEMKT:BHB) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Bar Harbor Bankshares's P/E ratio is 12.57. That is equivalent to an earnings yield of about 8.0%.
View our latest analysis for Bar Harbor Bankshares
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Bar Harbor Bankshares:
P/E of 12.57 = $24.29 ÷ $1.93 (Based on the year to June 2019.)
Is A High Price-to-Earnings Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. 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.
Does Bar Harbor Bankshares 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 (12.5) for companies in the banks industry is roughly the same as Bar Harbor Bankshares's P/E.
Bar Harbor Bankshares's P/E tells us that market participants think its prospects are roughly in line with its industry. So if Bar Harbor Bankshares actually outperforms its peers going forward, that should be a positive for the share price. Further research into factors such as insider buying and selling, could help you form your own view on whether that is likely.
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. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. 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.
Bar Harbor Bankshares's earnings per share fell by 5.5% in the last twelve months. But over the longer term (5 years) earnings per share have increased by 3.5%.
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. Thus, the metric does not reflect cash or debt held by the company. 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.