Banks share price not overblown
KATHMANDU, NOV 22:
Due to the better financial results of commercial banks, their share prices do not seem to be overblown based on their Price-to-Earning Ratio (P/E Ratio) in the first quarter.
The average P/E Ratio or multiple of 26 listed commercial banks stands at 45.63 times in the first quarter of the current fiscal year, which stood at 55.8 times by the third quarter of last fiscal year –– just before the rally started.
P/E Ratio is simply a company’s stock price divided by its last 12 months of earnings per share. “P/E Ratio shows whether the currently being traded price of the company’s stock is overpriced, underpriced or rightly priced,” said share analyst Rabindra Bhattarai.
Moreover, P/E Ratio indicates the willingness of investors to pay higher for the company’s earnings.
If a stock has a P/E of 15, that means the market is willing to pay 15 times its earnings for the stock.
In 2007-08, when share prices were riding high, P/E Ratios of a few companies were incredulously high at 300-400. Generally, P/E Ratio below 10 times is considered under priced, while of a company with P/ E Ratio above 30 is considered to be highly speculative.
However, it also depends on the growth prospects of the company.
If expectations of the company’s growth are high, investors pay more for the shares but even for companies that are generating good profits investors will not pay much if corporate governance is shaky.
Even though the banking subgroup index has surged by more than 50 per cent due to appreciating share prices due to the bullish stock market in the past seven months, P/E Ratio has declined as increased earning per share has pulled the price multiple down.
This quarter, the banking subgroup has achieved about 34 per cent growth in their net profit thus pushing the earning per share.
The average earning per share of banks during the period stood at Rs 22.5 before the rally started and increased to Rs 27.9 in the next six months.
Agriculture Development Bank’s P/E Ratio stood at 4.35 –– lowest among banks –– and Machhapuchchhre Bank has the highest P/E Ratio at 618 times as its earning per share declined to Rs 0.27.
Source: THT
