This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll show how you can use Banco Latinoamericano de Comercio Exterior, S.A's (NYSE:BLX) P/E ratio to inform your assessment of the investment opportunity. Looking at earnings over the last twelve months, Banco Latinoamericano de Comercio Exterior has a P/E ratio of 31.98. That is equivalent to an earnings yield of about 3.1%.
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Banco Latinoamericano de Comercio Exterior:
P/E of 31.98 = $19.03 ÷ $0.60 (Based on the year to June 2019.)
Is A High Price-to-Earnings 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.
Does Banco Latinoamericano de Comercio Exterior Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company. As you can see below, Banco Latinoamericano de Comercio Exterior has a higher P/E than the average company (13.4) in the diversified financial industry.
Banco Latinoamericano de Comercio Exterior's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Shareholders are clearly optimistic, but the future is always uncertain. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
How Growth Rates Impact P/E Ratios
Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
Banco Latinoamericano de Comercio Exterior's earnings per share fell by 67% in the last twelve months. And EPS is down 24% a year, over the last 5 years. This could justify a pessimistic P/E.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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.
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 Banco Latinoamericano de Comercio Exterior's P/E?
Net debt totals a substantial 207% of Banco Latinoamericano de Comercio Exterior's market cap. This level of debt justifies a relatively low P/E, so remain cognizant of the debt, if you're comparing it to other stocks.
The Verdict On Banco Latinoamericano de Comercio Exterior's P/E Ratio
Banco Latinoamericano de Comercio Exterior trades on a P/E ratio of 32, which is above its market average of 17.3. With significant debt and no EPS growth last year, shareholders are betting on an improvement in earnings from the company.
Investors have an opportunity when market expectations about a stock are wrong. 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.' So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
Of course you might be able to find a better stock than Banco Latinoamericano de Comercio Exterior. So you may wish to see this free collection of other companies that have grown earnings strongly.
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.
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. Thank you for reading.