Here's What BB&T Corporation's (NYSE:BBT) P/E Ratio Is Telling Us

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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). To keep it practical, we'll show how BB&T Corporation's (NYSE:BBT) P/E ratio could help you assess the value on offer. Based on the last twelve months, BB&T's P/E ratio is 12.21. That is equivalent to an earnings yield of about 8.2%.

View our latest analysis for BB&T

How Do You Calculate BB&T's P/E Ratio?

The formula for price to earnings is:

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

Or for BB&T:

P/E of 12.21 = $48.37 ÷ $3.96 (Based on the year 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 $1 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. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. That means unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.

BB&T increased earnings per share by a whopping 43% last year. And earnings per share have improved by 7.3% annually, over the last five years. I'd therefore be a little surprised if its P/E ratio was not relatively high.

How Does BB&T's P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. As you can see below BB&T has a P/E ratio that is fairly close for the average for the banks industry, which is 13.1.

That indicates that the market expects BB&T will perform roughly in line with other companies in its industry. So if BB&T actually outperforms its peers going forward, that should be a positive for the share price. Further research into factors such asmanagement tenure, could help you form your own view on whether that is likely.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

Don't forget that the P/E ratio considers market capitalization. That means it doesn't take debt or cash into account. 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 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.

How Does BB&T's Debt Impact Its P/E Ratio?

BB&T's net debt is 66% 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 Bottom Line On BB&T's P/E Ratio

BB&T trades on a P/E ratio of 12.2, which is below the US market average of 18.1. The company has a meaningful amount of debt on the balance sheet, but that should not eclipse the solid earnings growth. The low P/E ratio suggests current market expectations are muted, implying these levels of growth will not continue.

Investors should be looking to buy stocks that the market is wrong about. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. 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.