Why United Bankshares, Inc.’s (NASDAQ:UBSI) High P/E Ratio Isn’t Necessarily A Bad Thing

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This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll apply a basic P/E ratio analysis to United Bankshares, Inc.’s (NASDAQ:UBSI), to help you decide if the stock is worth further research. Looking at earnings over the last twelve months, United Bankshares has a P/E ratio of 15.76. That corresponds to an earnings yield of approximately 6.3%.

Check out our latest analysis for United Bankshares

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 United Bankshares:

P/E of 15.76 = $39.35 ÷ $2.5 (Based on the trailing twelve months to March 2019.)

Is A High P/E Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each $1 of company earnings. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.

How Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. 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. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

Notably, United Bankshares grew EPS by a whopping 49% in the last year. And earnings per share have improved by 7.2% annually, over the last five years. So we’d generally expect it to have a relatively high P/E ratio.

How Does United Bankshares’s P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. As you can see below, United Bankshares has a higher P/E than the average company (13) in the banks industry.

NasdaqGS:UBSI Price Estimation Relative to Market, April 30th 2019
NasdaqGS:UBSI Price Estimation Relative to Market, April 30th 2019

United Bankshares’s P/E tells us that market participants think the company will perform better than its industry peers, going forward. Shareholders are clearly optimistic, but the future is always uncertain. So investors should delve deeper. I like to check if company insiders have been buying or selling.

Remember: P/E Ratios Don’t Consider The Balance Sheet

The ‘Price’ in P/E reflects the market capitalization of the company. So it won’t reflect the advantage of cash, or disadvantage of debt. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

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.

How Does United Bankshares’s Debt Impact Its P/E Ratio?

United Bankshares has net debt worth 21% of its market capitalization. That’s enough debt to impact the P/E ratio a little; so keep it in mind if you’re comparing it to companies without debt.

The Verdict On United Bankshares’s P/E Ratio

United Bankshares has a P/E of 15.8. That’s below the average in the US market, which is 18.3. The company hasn’t stretched its balance sheet, and earnings growth was good last year. If the company can continue to grow earnings, then the current P/E may be unjustifiably low.

Investors have an opportunity when market expectations about a stock are wrong. 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 visual report on analyst forecasts could hold the key to an excellent investment decision.

You might be able to find a better buy than United Bankshares. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

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.