Why Banco de Sabadell, S.A.’s (BME:SAB) High P/E Ratio Isn’t Necessarily A Bad Thing

Seth Doty

Wed, Feb 6, 2019, 10:24 PM

This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll look at Banco de Sabadell, S.A.’s (BME:SAB) P/E ratio and reflect on what it tells us about the company’s share price. Banco de Sabadell has a price to earnings ratio of 15.09, based on the last twelve months. In other words, at today’s prices, investors are paying €15.09 for every €1 in prior year profit.

View our latest analysis for Banco de Sabadell

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 Banco de Sabadell:

P/E of 15.09 = €0.89 ÷ €0.059 (Based on the trailing twelve months to December 2018.)

Is A High P/E Ratio Good?

A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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

When earnings fall, the ‘E’ decreases, over time. That means unless the share price falls, the P/E will increase in a few years. Then, a higher P/E might scare off shareholders, pushing the share price down.

Banco de Sabadell’s earnings per share fell by 58% in the last twelve months. But over the longer term (5 years) earnings per share have increased by 6.4%. And it has shrunk its earnings per share by 21% per year over the last three years. This growth rate might warrant a low P/E ratio. This growth rate might warrant a low P/E ratio.

How Does Banco de Sabadell’s P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. As you can see below, Banco de Sabadell has a higher P/E than the average company (10.6) in the banks industry.

Banco de Sabadell’s P/E tells us that market participants think the company will perform better than its industry peers, going forward. The market is optimistic about the future, but that doesn’t guarantee future growth. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

The ‘Price’ in P/E reflects the market capitalization of the company. That means it doesn’t take debt or cash into account. Theoretically, a business can improve its earnings (and produce a lower P/E in the future), by taking on debt (or spending its remaining cash).