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The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at Bankia, S.A.'s (BME:BKIA) P/E ratio and reflect on what it tells us about the company's share price. What is Bankia's P/E ratio? Well, based on the last twelve months it is 10.27. In other words, at today's prices, investors are paying €10.27 for every €1 in prior year profit.
See our latest analysis for Bankia
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 Bankia:
P/E of 10.27 = €2.14 ÷ €0.21 (Based on the trailing twelve months to March 2019.)
Is A High Price-to-Earnings 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 is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
Does Bankia Have A Relatively High Or Low P/E For Its Industry?
We can get an indication of market expectations by looking at the P/E ratio. The image below shows that Bankia has a P/E ratio that is roughly in line with the banks industry average (10).
Its P/E ratio suggests that Bankia shareholders think that in the future it will perform about the same as other companies in its industry classification. The company could surprise by performing better than average, in the future. Checking factors such as director buying and selling. could help you form your own view on if that will happen.
How Growth Rates Impact P/E Ratios
Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. Earnings growth means that in the future the 'E' will be higher. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
It's great to see that Bankia grew EPS by 24% in the last year. Unfortunately, earnings per share are down 17% a year, over 5 years.
Remember: P/E Ratios Don't Consider The Balance Sheet
The 'Price' in P/E reflects the market capitalization of the company. 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.
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.