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 Fulton Financial Corporation’s (NASDAQ:FULT) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Fulton Financial’s P/E ratio is 15.52. In other words, at today’s prices, investors are paying $15.52 for every $1 in prior year profit.
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Fulton Financial:
P/E of 15.52 = $16.3 ÷ $1.05 (Based on the trailing twelve months to September 2018.)
Is A High P/E 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.
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. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. Then, a lower P/E should attract more buyers, pushing the share price up.
Fulton Financial maintained roughly steady earnings over the last twelve months. But over the longer term (5 years) earnings per share have increased by 4.7%.
How Does Fulton Financial’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. As you can see below Fulton Financial has a P/E ratio that is fairly close for the average for the banks industry, which is 15.6.
Fulton Financial’s P/E tells us that market participants think its prospects are roughly in line with its industry. The company could surprise by performing better than average, in the future. Checking factors such as the tenure of the board and management could help you form your own view on if that will happen.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don’t forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. 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).
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.
How Does Fulton Financial’s Debt Impact Its P/E Ratio?
Fulton Financial’s net debt is 35% of its market cap. This is enough debt that you’d have to make some adjustments before using the P/E ratio to compare it to a company with net cash.
The Verdict On Fulton Financial’s P/E Ratio
Fulton Financial has a P/E of 15.5. That’s below the average in the US market, which is 18.4. EPS grew over the last twelve months, and debt levels are quite reasonable. If you believe growth will continue – or even increase – then the low P/E may signify opportunity.
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.
But note: Fulton Financial may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
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 firstname.lastname@example.org.