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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 Walliser Kantonalbank’s (VTX:WKBN) P/E ratio to inform your assessment of the investment opportunity. Walliser Kantonalbank has a price to earnings ratio of 17.8, based on the last twelve months. That corresponds to an earnings yield of approximately 5.6%.
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 Walliser Kantonalbank:
P/E of 17.8 = CHF115.5 ÷ CHF6.49 (Based on the year to December 2018.)
Is A High P/E Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each CHF1 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.
Does Walliser Kantonalbank Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio indicates whether the market has higher or lower expectations of a company. As you can see below, Walliser Kantonalbank has a higher P/E than the average company (15.9) in the banks industry.
That means that the market expects Walliser Kantonalbank will outperform other companies in its industry.
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. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
Walliser Kantonalbank’s earnings per share grew by -3.4% in the last twelve months. And its annual EPS growth rate over 5 years is 1.9%. Unfortunately, earnings per share are down 2.8% a year, over 3 years.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
The ‘Price’ in P/E reflects the market capitalization of the company. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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.
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 Walliser Kantonalbank’s P/E?
Walliser Kantonalbank has net debt worth a very significant 120% of its market capitalization. This is a relatively high level of debt, so the stock probably deserves a relatively low P/E ratio. Keep that in mind when comparing it to other companies.
The Verdict On Walliser Kantonalbank’s P/E Ratio
Walliser Kantonalbank’s P/E is 17.8 which is about average (18.3) in the CH market. While it does have considerable debt, the market seems to be reassured by recent growth in earnings per share.
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. Although we don’t have analyst forecasts, you might want to assess this data-rich visualization of earnings, revenue and cash flow.
You might be able to find a better buy than Walliser Kantonalbank. 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).
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.