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A Sliding Share Price Has Us Looking At Banco Bilbao Vizcaya Argentaria, S.A.'s (BME:BBVA) P/E Ratio

To the annoyance of some shareholders, Banco Bilbao Vizcaya Argentaria (BME:BBVA) shares are down a considerable 33% in the last month. Indeed the recent decline has arguably caused some bitterness for shareholders who have held through the 33% drop over twelve months.

Assuming nothing else has changed, a lower share price makes a stock more attractive to potential buyers. In the long term, share prices tend to follow earnings per share, but in the short term prices bounce around in response to short term factors (which are not always obvious). The implication here is that long term investors have an opportunity when expectations of a company are too low. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). A high P/E ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.

See our latest analysis for Banco Bilbao Vizcaya Argentaria

Does Banco Bilbao Vizcaya Argentaria Have A Relatively High Or Low P/E For Its Industry?

Banco Bilbao Vizcaya Argentaria's P/E is 7.52. You can see in the image below that the average P/E (7.5) for companies in the banks industry is roughly the same as Banco Bilbao Vizcaya Argentaria's P/E.

BME:BBVA Price Estimation Relative to Market, March 10th 2020
BME:BBVA Price Estimation Relative to Market, March 10th 2020

Its P/E ratio suggests that Banco Bilbao Vizcaya Argentaria shareholders think that in the future it will perform about the same as other companies in its industry classification. So if Banco Bilbao Vizcaya Argentaria actually outperforms its peers going forward, that should be a positive for the share price. Checking factors such as director buying and selling. could help you form your own view on if that will happen.

How Growth Rates Impact P/E Ratios

Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. That means unless the share price falls, the P/E will increase in a few years. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.

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Banco Bilbao Vizcaya Argentaria shrunk earnings per share by 38% over the last year. But it has grown its earnings per share by 3.2% per year over the last five years. And EPS is down 1.6% a year, over the last 3 years. This might lead to low expectations.

Remember: P/E Ratios Don't Consider The Balance Sheet

Don't forget that the P/E ratio considers market capitalization. So it won't reflect the advantage of cash, or disadvantage of debt. 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.

Is Debt Impacting Banco Bilbao Vizcaya Argentaria's P/E?

Banco Bilbao Vizcaya Argentaria has net cash of €8.9b. This is fairly high at 38% of its market capitalization. That might mean balance sheet strength is important to the business, but should also help push the P/E a bit higher than it would otherwise be.

The Verdict On Banco Bilbao Vizcaya Argentaria's P/E Ratio

Banco Bilbao Vizcaya Argentaria trades on a P/E ratio of 7.5, which is below the ES market average of 15.9. The recent drop in earnings per share would make investors cautious, the healthy balance sheet means the company retains potential for future growth. If that occurs, the current low P/E could prove to be temporary. Given Banco Bilbao Vizcaya Argentaria's P/E ratio has declined from 11.2 to 7.5 in the last month, we know for sure that the market is more worried about the business today, than it was back then. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for deep value investors this stock might justify some research.

When the market is wrong about a stock, it gives savvy investors an opportunity. 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 report on the analyst consensus forecasts could help you make a master move on this stock.

You might be able to find a better buy than Banco Bilbao Vizcaya Argentaria. 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).

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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.