Does SpareBank 1 Østfold Akershus (OB:SOAG) Have A Good P/E Ratio?

This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). To keep it practical, we’ll show how SpareBank 1 Østfold Akershus’s (OB:SOAG) P/E ratio could help you assess the value on offer. SpareBank 1 Østfold Akershus has a P/E ratio of 7.98, based on the last twelve months. In other words, at today’s prices, investors are paying NOK7.98 for every NOK1 in prior year profit.

View our latest analysis for SpareBank 1 Østfold Akershus

How Do You Calculate A P/E Ratio?

The formula for price to earnings is:

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

Or for SpareBank 1 Østfold Akershus:

P/E of 7.98 = NOK216 ÷ NOK27.06 (Based on the year to December 2018.)

Is A High P/E Ratio Good?

A higher P/E ratio means that buyers have to pay a higher price for each NOK1 the company has earned over the last year. 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. When earnings grow, the ‘E’ increases, over time. That means even if the current P/E is high, it will reduce over time if the share price stays flat. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

SpareBank 1 Østfold Akershus saw earnings per share improve by -4.1% last year. And its annual EPS growth rate over 5 years is 8.1%.

How Does SpareBank 1 Østfold Akershus’s P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that SpareBank 1 Østfold Akershus has a lower P/E than the average (9.3) P/E for companies in the banks industry.

OB:SOAG Price Estimation Relative to Market, March 28th 2019
OB:SOAG Price Estimation Relative to Market, March 28th 2019

Its relatively low P/E ratio indicates that SpareBank 1 Østfold Akershus shareholders think it will struggle to do as well as other companies in its industry classification. Many investors like to buy stocks when the market is pessimistic about their prospects. 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. Thus, the metric does not reflect cash or debt held by the company. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

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.

How Does SpareBank 1 Østfold Akershus’s Debt Impact Its P/E Ratio?

SpareBank 1 Østfold Akershus’s net debt is considerable, at 129% of its 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 Verdict On SpareBank 1 Østfold Akershus’s P/E Ratio

SpareBank 1 Østfold Akershus’s P/E is 8 which is below average (13.4) in the NO market. While the recent EPS growth is a positive, the significant amount of debt on the balance sheet may be contributing to pessimistic market expectations.

When the market is wrong about a stock, it gives savvy investors an opportunity. 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. 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 SpareBank 1 Østfold Akershus. 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.