Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll show how you can use Banco Bilbao Vizcaya Argentaria, S.A.'s (BME:BBVA) P/E ratio to inform your assessment of the investment opportunity. Banco Bilbao Vizcaya Argentaria has a P/E ratio of 7.47, based on the last twelve months. That corresponds to an earnings yield of approximately 13.4%.
How Do I Calculate Banco Bilbao Vizcaya Argentaria's Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Banco Bilbao Vizcaya Argentaria:
P/E of 7.47 = €4.78 ÷ €0.64 (Based on the trailing twelve months to September 2019.)
Is A High P/E Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each €1 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 Does Banco Bilbao Vizcaya Argentaria'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 (9.9) for companies in the banks industry is higher than Banco Bilbao Vizcaya Argentaria's P/E.
Its relatively low P/E ratio indicates that Banco Bilbao Vizcaya Argentaria shareholders think it will struggle to do as well as other companies in its industry classification. Many investors like to buy stocks when the market is pessimistic about their prospects. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
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 unless the share price increases, the P/E will reduce in a few years. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
Banco Bilbao Vizcaya Argentaria saw earnings per share improve by -3.2% last year. And its annual EPS growth rate over 3 years is 5.4%.
Remember: P/E Ratios Don't Consider The Balance Sheet
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. Thus, the metric does not reflect cash or debt held by the company. In theory, a company can lower its future P/E ratio by using cash or debt to invest in 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).
Banco Bilbao Vizcaya Argentaria's Balance Sheet
Banco Bilbao Vizcaya Argentaria has net cash of €11b. This is fairly high at 35% of its market capitalization. That might mean balance sheet strength is important to the business, but should also help push the P/E a bit higher than it would otherwise be.
The Verdict On Banco Bilbao Vizcaya Argentaria's P/E Ratio
Banco Bilbao Vizcaya Argentaria's P/E is 7.5 which is below average (17.6) in the ES market. Earnings improved over the last year. And the healthy balance sheet means the company can sustain growth while the P/E suggests shareholders don't think it will.
When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
If you spot an error that warrants correction, please contact the editor at email@example.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.
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