Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. To keep it practical, we'll show how Bank für Tirol und Vorarlberg AG's (VIE:BTS) P/E ratio could help you assess the value on offer. Looking at earnings over the last twelve months, Bank für Tirol und Vorarlberg has a P/E ratio of 8.22. That is equivalent to an earnings yield of about 12.2%.
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Bank für Tirol und Vorarlberg:
P/E of 8.22 = €29.60 ÷ €3.60 (Based on the year to June 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. That isn't a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business's prospects, relative to stocks with a lower P/E.
Does Bank für Tirol und Vorarlberg 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 Bank für Tirol und Vorarlberg has a P/E ratio that is roughly in line with the banks industry average (8.2).
Bank für Tirol und Vorarlberg's P/E tells us that market participants think its prospects are roughly in line with its industry. So if Bank für Tirol und Vorarlberg 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
Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. 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.
Notably, Bank für Tirol und Vorarlberg grew EPS by a whopping 28% in the last year. And it has bolstered its earnings per share by 4.4% per year over the last five years. I'd therefore be a little surprised if its P/E ratio was not relatively high. Unfortunately, earnings per share are down 7.3% a year, over 3 years.
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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.
Bank für Tirol und Vorarlberg's Balance Sheet
Net debt totals a substantial 279% of Bank für Tirol und Vorarlberg's market cap. This is a relatively high level of debt, so the stock probably deserves a relatively low P/E ratio. Keep that in mind when comparing it to other companies.
The Verdict On Bank für Tirol und Vorarlberg's P/E Ratio
Bank für Tirol und Vorarlberg has a P/E of 8.2. That's below the average in the AT market, which is 14.7. The company has a meaningful amount of debt on the balance sheet, but that should not eclipse the solid earnings growth. The low P/E ratio suggests current market expectations are muted, implying these levels of growth will not continue.
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. We don't have analyst forecasts, but you might want to assess this data-rich visualization of earnings, revenue and cash flow.
Of course you might be able to find a better stock than Bank für Tirol und Vorarlberg. So you may wish to see this free collection of other companies that have grown earnings strongly.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.
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. Thank you for reading.