This article is written for those who want to get better at using price to earnings ratios (P/E ratios). To keep it practical, we’ll show how IBERIABANK Corporation’s (NASDAQ:IBKC) P/E ratio could help you assess the value on offer. IBERIABANK has a P/E ratio of 16.16, based on the last twelve months. That is equivalent to an earnings yield of about 6.2%.
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How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for IBERIABANK:
P/E of 16.16 = $70.71 ÷ $4.37 (Based on the trailing twelve months to September 2018.)
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.
How Growth Rates Impact P/E Ratios
When earnings fall, the ‘E’ decreases, over time. That means unless the share price falls, the P/E will increase in a few years. A higher P/E should indicate the stock is expensive relative to others — and that may encourage shareholders to sell.
Notably, IBERIABANK grew EPS by a whopping 25% in the last year. And its annual EPS growth rate over 5 years is 6.4%. With that performance, I would expect it to have an above average P/E ratio. But earnings per share are down 5.9% per year over the last three years.
How Does IBERIABANK’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. As you can see below, IBERIABANK has a higher P/E than the average company (14.6) in the banks industry.
That means that the market expects IBERIABANK will outperform other companies in its industry. 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.
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. Theoretically, a business can improve its earnings (and produce a lower P/E in the future), by taking on debt (or spending its remaining 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).
IBERIABANK’s Balance Sheet
IBERIABANK’s net debt is 59% of its market cap. This is a reasonably significant level of debt — all else being equal you’d expect a much lower P/E than if it had net cash.
The Bottom Line On IBERIABANK’s P/E Ratio
IBERIABANK’s P/E is 16.2 which is about average (16.8) in the US market. The significant levels of debt do detract somewhat from the strong earnings growth. However, the P/E ratio implies that most doubt the strong growth will continue.
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 report on the analyst consensus forecasts could help you make a master move on this stock.
Of course you might be able to find a better stock than IBERIABANK. So you may wish to see this free collection of other companies that have grown earnings strongly.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.