The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll look at Banco Santander-Chile’s (SNSE:BSANTANDER) P/E ratio and reflect on what it tells us about the company’s share price. Banco Santander-Chile has a price to earnings ratio of 13.74, based on the last twelve months. That corresponds to an earnings yield of approximately 7.3%.
How Do I Calculate Banco Santander-Chile’s Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Banco Santander-Chile:
P/E of 13.74 = CLP43.60 ÷ CLP3.17 (Based on the trailing twelve months to September 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each CLP1 of company earnings. 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 Banco Santander-Chile Have A Relatively High Or Low P/E For Its Industry?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. The image below shows that Banco Santander-Chile has a P/E ratio that is roughly in line with the banks industry average (13.7).
Banco Santander-Chile’s P/E tells us that market participants think its prospects are roughly in line with its industry. So if Banco Santander-Chile actually outperforms its peers going forward, that should be a positive for the share price. Further research into factors such as insider buying and selling, could help you form your own view on whether that is likely.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. 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. Then, a lower P/E should attract more buyers, pushing the share price up.
Banco Santander-Chile increased earnings per share by 6.1% last year. And it has improved its earnings per share by 10% per year over the last three years.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. That means it doesn’t take debt or cash into account. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.
Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.
Is Debt Impacting Banco Santander-Chile’s P/E?
Banco Santander-Chile’s net debt is considerable, at 107% of its 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 Verdict On Banco Santander-Chile’s P/E Ratio
Banco Santander-Chile’s P/E is 13.7 which is about average (12.9) in the CL market. While it does have considerable debt, the market seems to be reassured by recent growth in earnings per share.
Investors have an opportunity when market expectations about a stock are wrong. People often underestimate remarkable growth — so investors can make money when fast growth is not fully appreciated. 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.
You might be able to find a better buy than Banco Santander-Chile. 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).
If you spot an error that warrants correction, please contact the editor at email@example.com. 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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