To the annoyance of some shareholders, Bank Of Ireland Group (ISE:BIRG) shares are down a considerable 31% in the last month. That drop has capped off a tough year for shareholders, with the share price down 57% in that time.
All else being equal, a share price drop should make a stock more attractive to potential investors. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. The implication here is that long term investors have an opportunity when expectations of a company are too low. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.
See our latest analysis for Bank Of Ireland Group
How Does Bank Of Ireland Group’s P/E Ratio Compare To Its Peers?
Bank Of Ireland Group’s P/E of 7.36 indicates relatively low sentiment towards the stock. We can see in the image below that the average P/E (8.8) for companies in the banks industry is higher than Bank Of Ireland Group’s P/E.
Bank Of Ireland Group’s P/E tells us that market participants think it will not fare as well as its peers in the same industry.
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the ‘E’ will be lower. 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.
Bank Of Ireland Group’s earnings per share fell by 26% in the last twelve months. But EPS is up 28% over the last 5 years. And it has shrunk its earnings per share by 7.0% per year over the last three years. This might lead to low expectations.
Remember: P/E Ratios Don’t Consider The Balance Sheet
It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. So it won’t reflect the advantage of cash, or disadvantage of debt. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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 Bank Of Ireland Group’s P/E?
Net debt totals a substantial 167% of Bank Of Ireland Group’s market cap. This level of debt justifies a relatively low P/E, so remain cognizant of the debt, if you’re comparing it to other stocks.
The Bottom Line On Bank Of Ireland Group’s P/E Ratio
Bank Of Ireland Group has a P/E of 7.4. That’s below the average in the IE market, which is 11.6. Given meaningful debt, and a lack of recent growth, the market looks to be extrapolating this recent performance; reflecting low expectations for the future. Given Bank Of Ireland Group’s P/E ratio has declined from 10.7 to 7.4 in the last month, we know for sure that the market is more worried about the business today, than it was back then. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for deep value investors this stock might justify some research.
Investors should be looking to buy stocks that the market is wrong about. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. 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.
Of course you might be able to find a better stock than Bank Of Ireland Group. So you may wish to see this free collection of other companies that have grown earnings strongly.
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 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. Thank you for reading.