Yahoo Finance Does KeyCorp's (NYSE:KEY) P/E Ratio Signal A Buying Opportunity?
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Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. To keep it practical, we'll show how KeyCorp's (NYSE:KEY) P/E ratio could help you assess the value on offer. KeyCorp has a price to earnings ratio of 9.86, based on the last twelve months. That means that at current prices, buyers pay $9.86 for every $1 in trailing yearly profits.
Check out our latest analysis for KeyCorp
How Do I Calculate KeyCorp's Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for KeyCorp:
P/E of 9.86 = $17.03 ÷ $1.73 (Based on the trailing twelve months to March 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each $1 of company earnings. 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 Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
Notably, KeyCorp grew EPS by a whopping 39% in the last year. And its annual EPS growth rate over 5 years is 12%. I'd therefore be a little surprised if its P/E ratio was not relatively high.
Does KeyCorp Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company. The image below shows that KeyCorp has a lower P/E than the average (12.6) P/E for companies in the banks industry.
This suggests that market participants think KeyCorp will underperform other companies in its industry. Since the market seems unimpressed with KeyCorp, it's quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or selling.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
Don't forget that the P/E ratio considers market capitalization. That means it doesn't take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.
How Does KeyCorp's Debt Impact Its P/E Ratio?
KeyCorp's net debt is 77% of its market cap. This is a reasonably significant level of debt -- all else being equal you'd expect a much lower P/E than if it had net cash.
The Verdict On KeyCorp's P/E Ratio
KeyCorp has a P/E of 9.9. That's below the average in the US market, which is 17.8. While the EPS growth last year was strong, the significant debt levels reduce the number of options available to management. If it continues to grow, then the current low P/E may prove to be unjustified.
Investors have an opportunity when market expectations about a stock are wrong. 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. 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.
You might be able to find a better buy than KeyCorp. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
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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.
