Yahoo Finance Is Banco Santander SA. (LON:BNC) A Buy At Its Current PE Ratio?
Banco Santander SA. (LSE:BNC) is trading with a trailing P/E of 12.3x, which is lower than the industry average of 15.1x. While BNC might seem like an attractive stock to buy, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. Today, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. Check out our latest analysis for Banco Santander
Breaking down the P/E ratio
The P/E ratio is one of many ratios used in relative valuation. It compares a stock’s price per share to the stock’s earnings per share. A more intuitive way of understanding the P/E ratio is to think of it as how much investors are paying for each pound of the company’s earnings.
P/E Calculation for BNC
Price-Earnings Ratio = Price per share ÷ Earnings per share
BNC Price-Earnings Ratio = €4.99 ÷ €0.405 = 12.3x
On its own, the P/E ratio doesn’t tell you much; however, it becomes extremely useful when you compare it with other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to BNC, such as company lifetime and products sold. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. Since BNC’s P/E of 12.3x is lower than its industry peers (15.1x), it means that investors are paying less than they should for each dollar of BNC’s earnings. Therefore, according to this analysis, BNC is an under-priced stock.
Assumptions to be aware of
While our conclusion might prompt you to buy BNC immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to BNC. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you are comparing lower risk firms with BNC, then its P/E would naturally be lower than its peers, as investors would value those with lower risk at a higher price. The second assumption that must hold true is that the stocks we are comparing BNC to are fairly valued by the market. If this does not hold, there is a possibility that BNC’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to add more of BNC to your portfolio. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned above. Remember that basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PE ratio is very one-dimensional. If you have not done so already, I urge you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for BNC’s future growth? Take a look at our free research report of analyst consensus for BNC’s outlook.
Past Track Record: Has BNC been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of BNC’s historicals for more clarity.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
