Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. To keep it practical, we'll show how Banque Cantonale Vaudoise's (VTX:BCVN) P/E ratio could help you assess the value on offer. Looking at earnings over the last twelve months, Banque Cantonale Vaudoise has a P/E ratio of 17.87. In other words, at today's prices, investors are paying CHF17.87 for every CHF1 in prior year profit.
View our latest analysis for Banque Cantonale Vaudoise
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Banque Cantonale Vaudoise:
P/E of 17.87 = CHF726 ÷ CHF40.63 (Based on the year to December 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each CHF1 of company earnings. 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 Banque Cantonale Vaudoise's P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. As you can see below, Banque Cantonale Vaudoise has a higher P/E than the average company (15.7) in the banks industry.
Its relatively high P/E ratio indicates that Banque Cantonale Vaudoise 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 delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the 'E' increases, over time. That means unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.
Banque Cantonale Vaudoise increased earnings per share by 9.2% last year. And it has bolstered its earnings per share by 4.5% per year over the last five years.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
Don't forget that the P/E ratio considers market capitalization. That means it doesn't take debt or cash into account. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).
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.