Does Jutlander Bank A/S (CPH:JUTBK) Have A Good P/E Ratio?

Want to participate in a short research study? Help shape the future of investing tools and receive a $20 prize!

The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). To keep it practical, we’ll show how Jutlander Bank A/S’s (CPH:JUTBK) P/E ratio could help you assess the value on offer. Jutlander Bank has a P/E ratio of 6.49, based on the last twelve months. That corresponds to an earnings yield of approximately 15%.

View our latest analysis for Jutlander Bank

How Do I Calculate A Price To Earnings Ratio?

The formula for price to earnings is:

Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)

Or for Jutlander Bank:

P/E of 6.49 = DKK180.5 ÷ DKK27.8 (Based on the trailing twelve months 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 DKK1 of company earnings. That isn’t a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business’s prospects, relative to stocks with a lower P/E.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. When earnings grow, the ‘E’ increases, over time. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.

Jutlander Bank shrunk earnings per share by 2.1% last year. But it has grown its earnings per share by 33% per year over the last five years.

How Does Jutlander Bank’s P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. The image below shows that Jutlander Bank has a lower P/E than the average (7.7) P/E for companies in the banks industry.

Its relatively low P/E ratio indicates that Jutlander Bank shareholders think it will struggle to do as well as other companies in its industry classification. Many investors like to buy stocks when the market is pessimistic about their prospects. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.

Remember: P/E Ratios Don’t Consider The Balance Sheet

Don’t forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. Theoretically, a business can improve its earnings (and produce a lower P/E in the future), by taking on debt (or spending its remaining cash).

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.

How Does Jutlander Bank’s Debt Impact Its P/E Ratio?

Jutlander Bank has net cash of ø12m. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.

The Verdict On Jutlander Bank’s P/E Ratio

Jutlander Bank’s P/E is 6.5 which is below average (15.5) in the DK market. The recent drop in earnings per share would make investors cautious, the healthy balance sheet means the company retains potential for future growth. If that occurs, the current low P/E could prove to be temporary.

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. Although we don’t have analyst forecasts, you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E 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.