Yahoo Finance Here's What Bendigo and Adelaide Bank Limited's (ASX:BEN) P/E Is Telling Us
Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll look at Bendigo and Adelaide Bank Limited's (ASX:BEN) P/E ratio and reflect on what it tells us about the company's share price. What is Bendigo and Adelaide Bank's P/E ratio? Well, based on the last twelve months it is 14.07. That corresponds to an earnings yield of approximately 7.1%.
View our latest analysis for Bendigo and Adelaide Bank
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Bendigo and Adelaide Bank:
P/E of 14.07 = A$10.84 ÷ A$0.77 (Based on the trailing twelve months to June 2019.)
Is A High P/E Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.
How Does Bendigo and Adelaide Bank'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 Bendigo and Adelaide Bank has a higher P/E than the average (11.8) P/E for companies in the banks industry.
Its relatively high P/E ratio indicates that Bendigo and Adelaide Bank shareholders think it will perform better than other companies in its industry classification. The market is optimistic about the future, but that doesn't guarantee future growth. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
How Growth Rates Impact P/E Ratios
Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. That means unless the share price falls, the P/E will increase in a few years. Then, a higher P/E might scare off shareholders, pushing the share price down.
Bendigo and Adelaide Bank's earnings per share fell by 14% in the last twelve months. And over the longer term (5 years) earnings per share have decreased 2.6% annually. This growth rate might warrant a below average P/E ratio.
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. So it won't reflect the advantage of cash, or disadvantage of debt. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on 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.
So What Does Bendigo and Adelaide Bank's Balance Sheet Tell Us?
Bendigo and Adelaide Bank has net cash of AU$1.8b. This is fairly high at 34% of its market capitalization. That might mean balance sheet strength is important to the business, but should also help push the P/E a bit higher than it would otherwise be.
The Bottom Line On Bendigo and Adelaide Bank's P/E Ratio
Bendigo and Adelaide Bank has a P/E of 14.1. That's below the average in the AU market, which is 18.6. Falling earnings per share are likely to be keeping potential buyers away, the relatively strong balance sheet will allow the company time to invest in growth. If it achieves that, then there's real potential that the low P/E could eventually indicate undervaluation.
Investors should be looking to buy stocks that the market is wrong about. 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.
But note: Bendigo and Adelaide Bank 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 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.
