Why Old National Bancorp’s (NASDAQ:ONB) High P/E Ratio Isn’t Necessarily A Bad Thing

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 Old National Bancorp’s (NASDAQ:ONB) P/E ratio to inform your assessment of the investment opportunity. Old National Bancorp has a P/E ratio of 13.79, based on the last twelve months. That means that at current prices, buyers pay $13.79 for every $1 in trailing yearly profits.

See our latest analysis for Old National Bancorp

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 Old National Bancorp:

P/E of 13.79 = $16.9 ÷ $1.23 (Based on the trailing twelve months 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 $1 the company has earned over the last year. 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

When earnings fall, the ‘E’ decreases, over time. That means even if the current P/E is low, it will increase over time if the share price stays flat. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.

Old National Bancorp increased earnings per share by a whopping 76% last year. Unfortunately, earnings per share are down 6.9% a year, over 3 years.

How Does Old National Bancorp’s P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. As you can see below Old National Bancorp has a P/E ratio that is fairly close for the average for the banks industry, which is 13.

NasdaqGS:ONB Price Estimation Relative to Market, April 5th 2019
NasdaqGS:ONB Price Estimation Relative to Market, April 5th 2019

Old National Bancorp’s P/E tells us that market participants think its prospects are roughly in line with its industry. So if Old National Bancorp actually outperforms its peers going forward, that should be a positive for the share price. Further research into factors such asmanagement tenure, could help you form your own view on whether that is likely.

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. 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.

Old National Bancorp’s Balance Sheet

Old National Bancorp has net debt worth 76% of its market capitalization. This is enough debt that you’d have to make some adjustments before using the P/E ratio to compare it to a company with net cash.

The Bottom Line On Old National Bancorp’s P/E Ratio

Old National Bancorp has a P/E of 13.8. That’s below the average in the US market, which is 17.9. The company may have significant debt, but EPS growth was good last year. If the company can continue to grow earnings, then the current P/E may be unjustifiably low.

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 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.

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.