Does Unicaja Banco, S.A.'s (BME:UNI) P/E Ratio Signal A Buying Opportunity?

By
Simply Wall St
Published
February 26, 2020
BME:UNI
Source: Shutterstock

This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll look at Unicaja Banco, S.A.'s (BME:UNI) P/E ratio and reflect on what it tells us about the company's share price. Looking at earnings over the last twelve months, Unicaja Banco has a P/E ratio of 8.75. In other words, at today's prices, investors are paying €8.75 for every €1 in prior year profit.

Check out our latest analysis for Unicaja Banco

How Do I Calculate A Price To Earnings Ratio?

The formula for price to earnings is:

Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)

Or for Unicaja Banco:

P/E of 8.75 = EUR0.90 ÷ EUR0.10 (Based on the year to December 2019.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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'.

How Does Unicaja Banco's P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. You can see in the image below that the average P/E (9.2) for companies in the banks industry is roughly the same as Unicaja Banco's P/E.

BME:UNI Price Estimation Relative to Market, February 27th 2020
BME:UNI Price Estimation Relative to Market, February 27th 2020

Unicaja Banco's P/E tells us that market participants think its prospects are roughly in line with its industry. So if Unicaja Banco actually outperforms its peers going forward, that should be a positive for the share price. I would further inform my view by checking insider buying and selling., among other things.

How Growth Rates Impact P/E Ratios

Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. That means even if the current P/E is low, it will increase over time if the share price stays flat. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.

It's great to see that Unicaja Banco grew EPS by 14% in the last year. In contrast, EPS has decreased by 27%, annually, over 5 years.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

Don't forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

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).

So What Does Unicaja Banco's Balance Sheet Tell Us?

Net debt totals a substantial 170% of Unicaja Banco's 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 Bottom Line On Unicaja Banco's P/E Ratio

Unicaja Banco has a P/E of 8.8. That's below the average in the ES market, which is 16.4. The company may have significant debt, but EPS growth was good last year. If it continues to grow, then the current low P/E may prove to be unjustified.

Investors have an opportunity when market expectations about a stock are wrong. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

Of course you might be able to find a better stock than Unicaja Banco. So you may wish to see this free collection of other companies that have grown earnings strongly.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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.

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. Thank you for reading.

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