Price-to-earnings (P/E) ratios are popular valuation metrics among stock market investors. The ratio is a simple measure of the company's stock price relative to its earnings per share (EPS). High P/E ratios suggest that a stock is trading at a high price relative to earnings and might be overvalued. However, looking at P/E ratios alone isn't enough. One must also consider the company's earnings growth rate, its historical P/E ratio, and the ratios of the overall sector. That's certainly the case with banking stocks today.
Understanding P/E Ratios
The price-to-earnings (P/E) ratio is one of the most widely used equity evaluation measures by investors and analysts. It is simple to calculate because the ratio is computed by dividing the current stock price by EPS. The result provides investors an assessment of a company's profits in relation to the price that investors have to pay for the company's stock. It is thus not merely an evaluation of the company, but an evaluation of the company's stock at current price levels as well.
As with all equity valuation metrics, the P/E ratio as a standalone number is of limited usefulness for analysis. For example, a company with a high earnings growth rate should typically command a higher P/E ratio because of the EPS component of the equation is increasing faster than the EPS of a slow-growth company. In addition, a P/E ratio might seem high, but this might be due to one or two quarters of weak numbers during a longer period of consistent earnings growth rates.
P/E Ratios and the Banking Sector
A company's P/E ratio is also important in terms of how it compares with similar firms in the same industry. For example, as of May 2021, Wells Fargo (WFC), one of the "big four" banks in the United States, was trading with a P/E ratio (Trailing Twelve Months) of 31.90, while its competitor, Citigroup (C), had a P/E ratio (TTM) of 10.63. Is that high or low?
Well, the banking sector as a whole had a P/E ratio of approximately 13.50 and compares with an overall market average P/E ratio of 36.7. However, this is a simple arithmetic average of P/E ratios isskewed by the figures for a very small number of firms with P/E ratios over 100 or 200. Still, the ratios of both Citi and Wells Fargo are below the average for the market as a whole.
The best-performing regional banks, because of the larger potential for rapid growth, tend to have P/E ratios noticeably higher than those for the major banks, which are large companies with relatively steady growth in revenues and earnings. The P/E of the major banks is 8.46, compared to 13.50 for the smaller regional banks. A mean or median average would show the banking industry's average P/E ratio much closer to typical market performance.
In sum, higher P/E ratios are typically considered to indicate higher growth and increased revenue potential, or at least that investors are anticipating higher growth, since they are willing to pay a greater multiple of current earnings per share to obtain the company's stock. However, if the company has a high P/E ratio relative to the overall market, and also high valuations relative to its peers in the sector, while earnings growth shows signs of deceleration, watch out! The stock might be overvalued.
The P/E of the major banks is 8.46, compared to 13.50 for the smaller regional banks
regional banks
A regional bank is one that operates in one region of a country, such as a province or within a group of provinces. Regional banks typically have a number of branches that serve individuals and businesses across a given region.
The P/B ratio is favored by value investors for its usefulness in identifying undervalued companies. The average P/B ratio for banking firms, as of the first quarter of 2021, is approximately 1.28.
For the Solvency Ratio, the average banking industry ratio for Primary Ratio was 14.13% and Capital Ratio 25.50%. For profitability ratios, the average banking industry ratio for Net Profit Margin is 80.48% and Return on Equity is 18.22%.
Well, the banking sector as a whole had a P/E ratio of approximately 13.50 and compares with an overall market average P/E ratio of 36.7. 4 However, this is a simple arithmetic average of P/E ratios is skewed by the figures for a very small number of firms with P/E ratios over 100 or 200.
The Banks - Regional industry has a total of 354 stocks, with a combined market cap of $1,424.85 billion, total revenue of $611.14 billion and a weighted average PE ratio of 11.63.
The ROA ratio is a company's net, after-tax income divided by its total assets. Since banks are highly leveraged, even a relatively low ROA of 1 to 2% may represent substantial revenues and profit for a bank.
Typically, the average P/E ratio is around 20 to 25. Anything below that would be considered a good price-to-earnings ratio, whereas anything above that would be a worse P/E ratio. But it doesn't stop there, as different industries can have different average P/E ratios.
With those two breadcrumbs, we see that Buffett has historically paid PE ratios of somewhere 11-15 times, which translates Ricky into earnings yields, earnings yields are just the inverse of the PE ratio of roughly 7-9 percent. These are low below market average valuations, that's the big takeaway so far, Ricky.
As of today (2024-07-08), JPMorgan Chase's share price is $204.71. JPMorgan Chase's Earnings per Share (Diluted) for the trailing twelve months (TTM) ended in Mar. 2024 was $16.56. Therefore, JPMorgan Chase's PE Ratio (TTM) for today is 12.36.
A stock's average price to earnings ratio over the trailing five-year period. It is calculated by adding the P/E ratios of the company for each fiscal year for the past five fiscal years, then dividing the sum by five.
The common financial ratios every business should track are 1) liquidity ratios 2) leverage ratios 3)efficiency ratio 4) profitability ratios and 5) market value ratios.
What is a good current ratio? "Banks like to see a current ratio of more than 1 to 1, perhaps 1.2 to 1 or slightly higher is generally considered acceptable," explains Trevor Fillo, Senior Account Manager with BDC in Edmonton, Alberta. "A current ratio of 1.2 to 1 or higher generally provides a cushion.
As a result, an unwritten rule in the industry is that a bank efficiency ratio of 50% is the optimal, achievable standard. And banks are still striving for this 50% standard. Even within the top 100 banks, the median efficiency ratio hovers at 59%.
As of today (2024-07-07), Bank of America's share price is $40.41. Bank of America's Earnings per Share (Diluted) for the trailing twelve months (TTM) ended in Mar. 2024 was $2.89. Therefore, Bank of America's PE Ratio (TTM) for today is 13.98.
According to PBBank (Public Bank Bhd)'s latest financial reports and stock price the company's current price-to-earnings ratio (TTM) is 11.6589. At the end of 2022 the company had a P/E ratio of 13.7.
Introduction: My name is Jonah Leffler, I am a determined, faithful, outstanding, inexpensive, cheerful, determined, smiling person who loves writing and wants to share my knowledge and understanding with you.
We notice you're using an ad blocker
Without advertising income, we can't keep making this site awesome for you.
