Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll look at SpareBank 1 Ringerike Hadeland’s (OB:RING) P/E ratio and reflect on what it tells us about the company’s share price. What is SpareBank 1 Ringerike Hadeland’s P/E ratio? Well, based on the last twelve months it is 7.61. In other words, at today’s prices, investors are paying NOK7.61 for every NOK1 in prior year profit.
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for SpareBank 1 Ringerike Hadeland:
P/E of 7.61 = NOK202 ÷ NOK26.56 (Based on the year to March 2019.)
Is A High P/E Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. That isn’t necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. If earnings are growing quickly, then the ‘E’ in the equation will increase faster than it would otherwise. And in that case, the P/E ratio itself will drop rather quickly. Then, a lower P/E should attract more buyers, pushing the share price up.
It’s great to see that SpareBank 1 Ringerike Hadeland grew EPS by 23% in the last year. And its annual EPS growth rate over 5 years is 9.4%. With that performance, you might expect an above average P/E ratio.
How Does SpareBank 1 Ringerike Hadeland’s P/E Ratio Compare To Its Peers?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. If you look at the image below, you can see SpareBank 1 Ringerike Hadeland has a lower P/E than the average (8.6) in the banks industry classification.
Its relatively low P/E ratio indicates that SpareBank 1 Ringerike Hadeland shareholders think it will struggle to do as well as other companies in its industry classification. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. You should delve deeper. I like to check if company insiders have been buying or 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. That means it doesn’t take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in 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.
SpareBank 1 Ringerike Hadeland’s Balance Sheet
SpareBank 1 Ringerike Hadeland has net debt worth a very significant 102% 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 SpareBank 1 Ringerike Hadeland’s P/E Ratio
SpareBank 1 Ringerike Hadeland has a P/E of 7.6. That’s below the average in the NO market, which is 13.6. 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 should be looking to buy stocks that the market is wrong about. As value investor Benjamin Graham famously said, ‘In the short run, the market is a voting machine but in the long run, it is a weighing machine.’ 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 SpareBank 1 Ringerike Hadeland. 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 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. Thank you for reading.