The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). To keep it practical, we’ll show how ING Bank Slaski SA’s (WSE:ING) P/E ratio could help you assess the value on offer. ING Bank Slaski has a price to earnings ratio of 16.17, based on the last twelve months. That corresponds to an earnings yield of approximately 6.2%.
How Do You Calculate ING Bank Slaski’s P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for ING Bank Slaski:
P/E of 16.17 = PLN179 ÷ PLN11.07 (Based on the year to September 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each PLN1 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
Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the ‘E’ will be higher. 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.
It’s great to see that ING Bank Slaski grew EPS by 12% in the last year. And earnings per share have improved by 8.9% annually, over the last five years. So one might expect an above average P/E ratio.
How Does ING Bank Slaski’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. You can see in the image below that the average P/E (13.3) for companies in the banks industry is lower than ING Bank Slaski’s P/E.
Its relatively high P/E ratio indicates that ING Bank Slaski 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
The ‘Price’ in P/E reflects the market capitalization of the company. 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 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.
ING Bank Slaski’s Balance Sheet
Net debt totals 15% of ING Bank Slaski’s market cap. It would probably deserve a higher P/E ratio if it was net cash, since it would have more options for growth.
The Verdict On ING Bank Slaski’s P/E Ratio
ING Bank Slaski trades on a P/E ratio of 16.2, which is above the PL market average of 10.3. While the company does use modest debt, its recent earnings growth is impressive. Therefore it seems reasonable that the market would have relatively high expectations of the company
When the market is wrong about a stock, it gives savvy investors an opportunity. People often underestimate remarkable growth — so investors can make money when fast growth is not fully appreciated. 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 find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.