Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll look at Skandinaviska Enskilda Banken AB (publ.)'s (STO:SEB A) P/E ratio and reflect on what it tells us about the company's share price. Based on the last twelve months, Skandinaviska Enskilda Banken AB (publ.)'s P/E ratio is 9.32. In other words, at today's prices, investors are paying SEK9.32 for every SEK1 in prior year profit.
How Do I Calculate Skandinaviska Enskilda Banken AB (publ.)'s Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Skandinaviska Enskilda Banken AB (publ.):
P/E of 9.32 = SEK81.60 ÷ SEK8.76 (Based on the year 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 SEK1 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.
How Does Skandinaviska Enskilda Banken AB (publ.)'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. As you can see below Skandinaviska Enskilda Banken AB (publ.) has a P/E ratio that is fairly close for the average for the banks industry, which is 9.3.
Its P/E ratio suggests that Skandinaviska Enskilda Banken AB (publ.) shareholders think that in the future it will perform about the same as other companies in its industry classification. So if Skandinaviska Enskilda Banken AB (publ.) 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
Probably the most important factor in determining what P/E a company trades on is the earnings growth. When earnings grow, the 'E' increases, over time. That means even if the current P/E is high, it will reduce over time if the share price stays flat. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
Skandinaviska Enskilda Banken AB (publ.)'s earnings per share fell by 13% in the last twelve months. But over the longer term (5 years) earnings per share have increased by 1.5%.
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).
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
So What Does Skandinaviska Enskilda Banken AB (publ.)'s Balance Sheet Tell Us?
Net debt totals a substantial 242% of Skandinaviska Enskilda Banken AB (publ.)'s 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 Bottom Line On Skandinaviska Enskilda Banken AB (publ.)'s P/E Ratio
Skandinaviska Enskilda Banken AB (publ.) has a P/E of 9.3. That's below the average in the SE market, which is 18.6. The P/E reflects market pessimism that probably arises from the lack of recent EPS growth, paired with significant leverage.
Investors should be looking to buy stocks that the market is wrong about. 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 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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