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 Walliser Kantonalbank's (VTX:WKBN) P/E ratio to inform your assessment of the investment opportunity. Walliser Kantonalbank has a price to earnings ratio of 17.26, based on the last twelve months. That corresponds to an earnings yield of approximately 5.8%.
View our latest analysis for Walliser Kantonalbank
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 Walliser Kantonalbank:
P/E of 17.26 = CHF112.00 ÷ CHF6.49 (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 Walliser Kantonalbank's P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. As you can see below Walliser Kantonalbank has a P/E ratio that is fairly close for the average for the banks industry, which is 16.1.
Walliser Kantonalbank's P/E tells us that market participants think its prospects are roughly in line with its industry. If the company has better than average prospects, then the market might be underestimating it. I would further inform my view by checking insider buying and selling., among other things.
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. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Walliser Kantonalbank increased earnings per share by 3.4% last year.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
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. 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.