Does Bank of America Corporation’s (NYSE:BAC) P/E Ratio Signal A Buying Opportunity? – Yahoo Finance

The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll apply a basic P/E ratio analysis to Bank of America Corporation’s (NYSE:BAC), to help you decide if the stock is worth further research. Bank of America has a P/E ratio of 12.79, based on the last twelve months. That means that at current prices, buyers pay $12.79 for every $1 in trailing yearly profits.

See our latest analysis for Bank of America

How Do You Calculate Bank of America’s P/E Ratio?

The formula for price to earnings is:

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

Or for Bank of America:

P/E of 12.79 = $35.03 ÷ $2.74 (Based on the year to September 2019.)

Is A High P/E 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 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.

Does Bank of America Have A Relatively High Or Low P/E For Its Industry?

One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. The image below shows that Bank of America has a P/E ratio that is roughly in line with the banks industry average (12.9).

That indicates that the market expects Bank of America will perform roughly in line with other companies in its industry. The company could surprise by performing better than average, in the future. I would further inform my view by checking insider buying and selling., among other things.

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. And in that case, the P/E ratio itself will drop rather quickly. Then, a lower P/E should attract more buyers, pushing the share price up.

Notably, Bank of America grew EPS by a whopping 29% in the last year. And it has bolstered its earnings per share by 47% per year over the last five years. So we’d generally expect it to have a relatively high P/E ratio.

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. So it won’t reflect the advantage of cash, or disadvantage of debt. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.

Is Debt Impacting Bank of America’s P/E?

With net cash of US$55b, Bank of America has a very strong balance sheet, which may be important for its business. Having said that, at 17% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.

The Verdict On Bank of America’s P/E Ratio

Bank of America’s P/E is 12.8 which is below average (18.9) in the US market. Not only should the net cash position reduce risk, but the recent growth has been impressive. The below average P/E ratio suggests that market participants don’t believe the strong growth will continue.

When the market is wrong about a stock, it gives savvy investors an opportunity. As value investor Benjamin Graham famously said, ‘In the short run, the market is a voting machine but in the long run, it is a weighing machine. So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.