What These Ratios Tell Us About Barclays PLC

Barclays PLC (LON:BARC) could deliver strong growth this year, says Roland Head.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Before I decide whether to buy a bank’s shares, I always like to look at its return on equity and its core tier 1 capital ratio.

These core financial ratios provide an indication of how successful a bank is at generating profits using shareholders’ funds, and of how strong its finances are. As a result, both ratios can have a strong influence on dividend payments and share price growth.

Today, I’m going to take a look at Barclays (LSE: BARC) (NYSE: BCS.US), to see how attractive it looks on these two measures.

Return on equity

The return a company generates on its shareholders’ funds is known as return on equity, or ROE. Return on equity can be calculated by dividing a company’s annual profit by its equity (ie, the difference between its total assets and its total liabilities) and is expressed as a percentage.

The fallout from the financial crisis and the PPI scandal have meant that Barclays share price has risen by just 9% over the last five years, while its dividend has been slashed from 11.5p (2008) to 6.5p (2012). This weak performance is reflected in its return on equity, too:

Barclays 2008 2009 2010 2011 2012 Average
ROE 12.7% 6.3% 7.3% 5.6% -1.9% 6.0%

Value vs. risk

Like Royal Bank of Scotland, Barclays currently trades at a discount to its tangible asset value per share, making it a potential value opportunity for long-term investors. However, these discounted valuations imply above-average levels of risk — in this case, the risk that the banks’ assets will suffer further write-downs.

One way of assessing this risk is with a bank’s core tier 1 capital ratio, which compares the value of the bank’s retained profits and equity with its loan book.

In the table below, I’ve listed Barclays’ core tier 1 capital ratio, ROE and discount to book value, alongside those of its UK-focused peers, Lloyds Banking Group and RBS.

Company Discount to tangible
asset value
Core Tier 1
Capital Ratio
5-year
average ROE
RBS 38% 10.8% -7.8%
Lloyds -20% 12.5% 1.6%
Barclays 16% 11.0% 6.0%

The figures above suggest to me that while RBS is offers the biggest value opportunity, it is also the highest risk. Safer Lloyds already looks fully priced, but Barclays offers an attractive discount to book value and a prospective 2.5% dividend yield. It also has the highest five-year average ROE.

Buy Barclays

I believe that Barclays remains a firm buy at current prices, providing an attractive balance between risk and reward.

Analysts expect the bank to deliver earnings of around 36p per share this year, and to raise its dividend by more than 10%, which could prompt further growth in its share price. However, if you already hold Barclays stock, then you might be interested in learning about five star shares that have been identified by the Fool’s team of analysts as 5 Shares To Retire On.

I own three of the shares featured in this free report, and I don’t mind admitting they are amongst the most successful investments I’ve ever made.

To find out the identity of these five companies, click here to download your copy of this report now, while it’s still available.

> Roland does not own shares in any of the companies mentioned in this article.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

More on Investing Articles

Investing Articles

Here’s how I’d aim for a ton of passive income from £20k in an ISA

To get the best passive income from an ISA, I think we need to balance risk with the potential rewards.…

Read more »

Abstract bull climbing indicators on stock chart
Investing Articles

2 FTSE 100 stocks I’d buy as the blue-chip index hits record highs

This Fool takes a look at a pair of quality FTSE 100 stocks that appear well-positioned for future gains, despite…

Read more »

Satellite on planet background
Small-Cap Shares

Here’s why AIM stock Filtronic is up 44% today

The share price of AIM stock Filtronic has surged on the back of some big news in relation to its…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

At a record high, there can still be bargain FTSE 100 shares to buy!

The FTSE 100 closed at a new all-time high this week. Our writer explains why there might still be bargain…

Read more »

Asian man looking concerned while studying paperwork at his desk in an office
Investing Articles

After profits plunge 28%, should investors consider buying Lloyds shares?

Lloyds has seen its shares wobble following the release of its latest results. But is this a chance for investors…

Read more »

Abstract bull climbing indicators on stock chart
Investing Articles

Something’s changed in a good way for Reckitt in Q1, and the share price may be about to take off

With the Reckitt share price near 4,475p, is this a no-brainer stock? This long-time Fool takes a closer look at…

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

This new boost in assets might just get the abrdn share price moving again

The abrdn share price has lost half its value in the past five years. But with investor confidence returning, are…

Read more »

Young Black man sat in front of laptop while wearing headphones
Investing Articles

As revenues rise 8%, is the Croda International share price set to bounce back?

The latest update from Croda International indicates that sales are starting to recover from the end of 2023, so is…

Read more »