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 Veritex Holdings, Inc.'s (NASDAQ:VBTX) P/E ratio to inform your assessment of the investment opportunity. Looking at earnings over the last twelve months, Veritex Holdings has a P/E ratio of 17.39. In other words, at today's prices, investors are paying $17.39 for every $1 in prior year profit.
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Veritex Holdings:
P/E of 17.39 = $23.55 ÷ $1.35 (Based on the trailing twelve months to June 2019.)
Is A High P/E Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each $1 the company has earned over the last year. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.'
Does Veritex Holdings 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 Veritex Holdings has a higher P/E than the average (12.3) P/E for companies in the banks industry.
That means that the market expects Veritex Holdings will outperform other companies in its industry. Clearly the market expects growth, but it isn't guaranteed. 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
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. And in that case, the P/E ratio itself will drop rather quickly. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
Veritex Holdings increased earnings per share by 6.9% last year. And it has bolstered its earnings per share by 15% per year over the last five years.
Remember: P/E Ratios Don't Consider The Balance Sheet
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.
How Does Veritex Holdings's Debt Impact Its P/E Ratio?
Veritex Holdings's net debt equates to 25% of its market capitalization. While that's enough to warrant consideration, it doesn't really concern us.
The Bottom Line On Veritex Holdings's P/E Ratio
Veritex Holdings has a P/E of 17.4. That's around the same as the average in the US market, which is 17.4. When you consider the modest EPS growth last year (along with some debt), it seems the market thinks the growth is sustainable.
Investors should be looking to buy stocks that the market is wrong about. 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 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.
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.