The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at Thurgauer Kantonalbank's (VTX:TKBP) P/E ratio and reflect on what it tells us about the company's share price. What is Thurgauer Kantonalbank's P/E ratio? Well, based on the last twelve months it is 16.11. In other words, at today's prices, investors are paying CHF16.11 for every CHF1 in prior year profit.
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 Thurgauer Kantonalbank:
P/E of 16.11 = CHF107.50 ÷ CHF6.67 (Based on the trailing twelve months to June 2019.)
Is A High P/E Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each CHF1 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 Thurgauer Kantonalbank's P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that Thurgauer Kantonalbank has a P/E ratio that is roughly in line with the banks industry average (16.7).
That indicates that the market expects Thurgauer Kantonalbank will perform roughly in line with other companies in its industry. So if Thurgauer Kantonalbank actually outperforms its peers going forward, that should be a positive for the share price. I would further inform my view by checking insider buying and selling., among other things.
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. And in that case, the P/E ratio itself will drop rather quickly. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Thurgauer Kantonalbank's earnings per share grew by -2.4% in the last twelve months. And its annual EPS growth rate over 3 years is 8.0%.
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. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).
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).
Is Debt Impacting Thurgauer Kantonalbank's P/E?
Thurgauer Kantonalbank's net debt is considerable, at 209% of its market cap. If you want to compare its P/E ratio to other companies, you must keep in mind that these debt levels would usually warrant a relatively low P/E.
The Verdict On Thurgauer Kantonalbank's P/E Ratio
Thurgauer Kantonalbank's P/E is 16.1 which is below average (20.4) in the CH market. The meaningful debt load is probably contributing to low expectations, even though it has improved earnings recently.
Investors should be looking to buy stocks that the market is wrong about. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. 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 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.
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