Following a strong post-‘Liberation Day’ recovery, the Barclays (LSE:BARC) share price is now only 2.2% below its 52-week high. But I still think there could be further to go.
That’s because the bank’s stock appears cheap based on two popular valuation measures.
1. Earnings
During the four quarters to 31 March, Barclays reported earnings per share of 38.7p.
Based on a share price of 324p as i write (26 May), this gives a backwards-looking (or trailing 12 months) price-to-earnings (P/E) ratio of 8.4.
But valuing a company in isolation isn’t particularly useful. It’s better to compare the figures to others in the same sector. And doing this reinforces my view that Barclays shares offer good value.
The P/E ratio of NatWest Group is 8.8. The equivalent for Lloyds Banking Group is 12.
2. Balance sheet
Another way to assess a company is to compare its accounting value to its market cap.
At 31 March, Barclays’ accounts suggest that it’s worth £75.5bn. This would be the amount realised if the bank ceased business, sold its assets and used the proceeds to repay its liabilities.
Of course, this assumes everything’s fairly stated. For their work, auditors use a concept of ‘materiality’. When they sign-off a company’s accounts they are not saying the numbers are correct. Instead, they are declaring they are ‘true and fair’.
You could write a book on the subject but, in simple terms, it means the financial statements are ‘not materially misstated’. When KPMG audited the bank’s 2024 accounts, materiality was £350m. This means actual earnings might be higher or lower by this amount, compared to the bank’s reported profit before tax of £8.1bn.
With a P/E ratio of 8.4, the group could be valued at up to £2.9bn more (or less). Taking a positive view, this implies a 6% premium to today’s share price.
However, leaving the issue of materiality to one side, the bank’s reported price-to-book ratio is 0.6. In other words, if everything was sold off and all debts cleared, there would be 526p a share left over to return to shareholders. This is 60% more than the current share price.
Again, this suggests the shares are cheaper than those of its two closest FTSE 100 peers. Both NatWest’s and Lloyds’ P/B ratios are very close to one.
Final thoughts
It wasn’t that long ago that I decided to add Barclays’ shares to my portfolio. At the time, I thought they offered good value. And my calculations above suggest this remains the case.
However, investing in banking stocks can be risky. Earnings can be volatile and the threat of bad loans is ever present. Falling interest rates could also squeeze margins in a competitive marketplace.
But I like Barclays growth story. It plans to increase its return on tangible equity to at least 12% by 2026, compared to the 10.5% reported in 2024. This might not sound like much but with current equity in excess of £50bn, a small percentage point increase can have a big impact on earnings.
With its attractive valuation and strong prospects, I plan to keep the bank’s shares in my ISA. And other long-term growth investors could consider the stock for their portfolios as well.
