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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll show how you can use Huntington Bancshares Incorporated’s (NASDAQ:HBAN) P/E ratio to inform your assessment of the investment opportunity. What is Huntington Bancshares’s P/E ratio? Well, based on the last twelve months it is 10.55. That means that at current prices, buyers pay $10.55 for every $1 in trailing yearly profits.
How Do You Calculate Huntington Bancshares’s P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Huntington Bancshares:
P/E of 10.55 = $13.26 ÷ $1.26 (Based on the trailing twelve months to March 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each $1 of company earnings. That isn’t a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business’s prospects, relative to stocks with a lower P/E.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. When earnings grow, the ‘E’ increases, over time. And in that case, the P/E ratio itself will drop rather quickly. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.
Most would be impressed by Huntington Bancshares earnings growth of 10% in the last year. And it has bolstered its earnings per share by 12% per year over the last five years. So one might expect an above average P/E ratio.
Does Huntington Bancshares Have A Relatively High Or Low P/E For Its Industry?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. We can see in the image below that the average P/E (12.6) for companies in the banks industry is higher than Huntington Bancshares’s P/E.
This suggests that market participants think Huntington Bancshares will underperform other companies in its industry. Since the market seems unimpressed with Huntington Bancshares, it’s quite possible it could surprise on the upside. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. 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.
While growth expenditure doesn’t always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.
Huntington Bancshares’s Balance Sheet
Net debt totals 75% of Huntington Bancshares’s market cap. This is a reasonably significant level of debt — all else being equal you’d expect a much lower P/E than if it had net cash.
The Verdict On Huntington Bancshares’s P/E Ratio
Huntington Bancshares’s P/E is 10.5 which is below average (17.5) in the US market. While the EPS growth last year was strong, the significant debt levels reduce the number of options available to management. 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.
But note: Huntington Bancshares may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
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.