This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll show how you can use First Commonwealth Financial Corporation's (NYSE:FCF) P/E ratio to inform your assessment of the investment opportunity. First Commonwealth Financial has a P/E ratio of 11.69, based on the last twelve months. That means that at current prices, buyers pay $11.69 for every $1 in trailing yearly profits.
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for First Commonwealth Financial:
P/E of 11.69 = $12.28 ÷ $1.05 (Based on the trailing twelve months 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 isn't necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
Does First Commonwealth Financial Have A Relatively High Or Low P/E For Its Industry?
We can get an indication of market expectations by looking at the P/E ratio. The image below shows that First Commonwealth Financial has a P/E ratio that is roughly in line with the banks industry average (12.2).
Its P/E ratio suggests that First Commonwealth Financial shareholders think that in the future it will perform about the same as other companies in its industry classification. So if First Commonwealth Financial 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. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
First Commonwealth Financial increased earnings per share by a whopping 27% last year. And its annual EPS growth rate over 5 years is 15%. With that performance, I would expect it to have an above average P/E ratio.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don't forget that the P/E ratio considers market capitalization. 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.
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.
Is Debt Impacting First Commonwealth Financial's P/E?
First Commonwealth Financial has net debt worth 57% of its market capitalization. If you want to compare its P/E ratio to other companies, you should absolutely keep in mind it has significant borrowings.
The Verdict On First Commonwealth Financial's P/E Ratio
First Commonwealth Financial's P/E is 11.7 which is below average (17.5) in the US market. The company may have significant debt, but EPS growth was good last year. The low P/E ratio suggests current market expectations are muted, implying these levels of growth will not continue.
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