The goal of this article is to teach you how to use 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. Veritex Holdings has a price to earnings ratio of 15.73, based on the last twelve months. That means that at current prices, buyers pay $15.73 for every $1 in trailing yearly profits.
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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 Veritex Holdings:
P/E of 15.73 = $25.59 ÷ $1.63 (Based on the year to December 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 isn’t a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business’s prospects, relative to stocks with a lower P/E.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. That means even if the current P/E is high, it will reduce over time if the share price stays flat. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Veritex Holdings increased earnings per share by a whopping 98% last year. And its annual EPS growth rate over 5 years is 16%. I’d therefore be a little surprised if its P/E ratio was not relatively high.
How Does Veritex Holdings’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. As you can see below, Veritex Holdings has a higher P/E than the average company (13.5) in the banks industry.
That means that the market expects Veritex Holdings will outperform other companies in its industry. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and selling.
Remember: P/E Ratios Don’t Consider The Balance Sheet
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).
Is Debt Impacting Veritex Holdings’s P/E?
Veritex Holdings has net cash of US$40m. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.
The Verdict On Veritex Holdings’s P/E Ratio
Veritex Holdings has a P/E of 15.7. That’s around the same as the average in the US market, which is 16.7. The balance sheet is healthy, and recent EPS growth impressive, but the P/E implies some caution from the market. Since analysts are predicting growth will continue, one might expect to see a higher P/E so it may be worth looking closer.
When the market is wrong about a stock, it gives savvy investors an opportunity. 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 visual report on analyst forecasts could hold they key to an excellent investment decision.
You might be able to find a better buy than Veritex Holdings. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
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.