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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 look at Liechtensteinische Landesbank Aktiengesellschaft’s (VTX:LLBN) P/E ratio and reflect on what it tells us about the company’s share price. What is Liechtensteinische Landesbank’s P/E ratio? Well, based on the last twelve months it is 24.42. That means that at current prices, buyers pay CHF24.42 for every CHF1 in trailing yearly profits.
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 Liechtensteinische Landesbank:
P/E of 24.42 = CHF64 ÷ CHF2.62 (Based on the year to December 2018.)
Is A High Price-to-Earnings Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing 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
Companies that shrink earnings per share quickly will rapidly decrease the ‘E’ in the equation. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
Liechtensteinische Landesbank shrunk earnings per share by 28% over the last year. But EPS is up 8.5% over the last 5 years. And over the longer term (3 years) earnings per share have decreased 3.0% annually. This could justify a low P/E.
How Does Liechtensteinische Landesbank’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. As you can see below, Liechtensteinische Landesbank has a higher P/E than the average company (16.2) in the banks industry.
Its relatively high P/E ratio indicates that Liechtensteinische Landesbank shareholders think it will perform better than other companies in its industry classification. Clearly the market expects growth, but it isn’t guaranteed. So further research is always essential. I often monitor director buying and selling.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
Don’t forget that the P/E ratio considers market capitalization. So it won’t reflect the advantage of cash, or disadvantage of debt. 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.
Is Debt Impacting Liechtensteinische Landesbank’s P/E?
Net debt totals just 2.4% of Liechtensteinische Landesbank’s market cap. The market might award it a higher P/E ratio if it had net cash, but its unlikely this low level of net borrowing is having a big impact on the P/E multiple.
The Verdict On Liechtensteinische Landesbank’s P/E Ratio
Liechtensteinische Landesbank’s P/E is 24.4 which is above average (18) in the CH market. With a bit of debt, but a lack of recent growth, it’s safe to say the market is expecting improved profit performance from the company, in the next few years.
Investors should be looking to buy stocks that the market is wrong about. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. 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 Liechtensteinische Landesbank. 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.