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Does Bank of America Corporation’s (NYSE:BAC) PE Ratio Signal A Buying Opportunity?

Bank of America Corporation (NYSE:BAC) trades with a trailing P/E of 16.8x, which is lower than the industry average of 17x. While BAC 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. In this article, I will explain what the P/E ratio is as well as what you should look out for when using it. View our latest analysis for Bank of America

What you need to know about the P/E ratio

NYSE:BAC PE PEG Gauge Jun 14th 18
NYSE:BAC PE PEG Gauge Jun 14th 18

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 dollar of the company’s earnings.

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P/E Calculation for BAC

Price-Earnings Ratio = Price per share ÷ Earnings per share

BAC Price-Earnings Ratio = $29.9 ÷ $1.782 = 16.8x

The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to BAC, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use. Since BAC’s P/E of 16.8x is lower than its industry peers (17x), it means that investors are paying less than they should for each dollar of BAC’s earnings. As such, our analysis shows that BAC represents an under-priced stock.

A few caveats

Before you jump to the conclusion that BAC is the perfect buying opportunity, it is important to realise that our conclusion rests on two assertions. The first is that our “similar companies” are actually similar to BAC, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with BAC, then investors would naturally value it at a lower price since it is a riskier investment. The second assumption that must hold true is that the stocks we are comparing BAC to are fairly valued by the market. If this does not hold, there is a possibility that BAC’s P/E is lower because our peer group is overvalued by the market.

What this means for you:

You may have already conducted fundamental analysis on the stock as a shareholder, so its current undervaluation could signal a good buying opportunity to increase your exposure to BAC. Now that you understand the ins and outs of the PE metric, you should know to bear in mind its limitations before you make an investment decision. 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 highly recommend you to complete your research by taking a look at the following:

  1. Future Outlook: What are well-informed industry analysts predicting for BAC’s future growth? Take a look at our free research report of analyst consensus for BAC’s outlook.

  2. Past Track Record: Has BAC 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 BAC’s historicals for more clarity.

  3. 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.