The Lloyds (LSE:LLOY) share price has been volatile over the past few years. In the past two years, for instance, the shares are up 56%. With interest rates on the rise, could I possibly buy this stock on the cheap? Let’s take a closer look.
A cheap share price?
First, are shares in Lloyds a bargain at the current price of 44p? To get a better idea, I’m referring to price-to-earnings (P/E) ratios.
These ratios are calculated by dividing the share price by earnings, or by forecast earnings when seeking forward P/E ratios.
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| Stock | Trailing P/E ratio | Forward P/E ratio |
| Lloyds | 7.5 | 6.43 |
| HSBC | 9.56 | 7.91 |
| Standard Chartered | 10.62 | 7.1 |
As we can see, the firm has lower trailing and forward P/E ratios than both HSBC and Standard Chartered, two major competitors.
By using this comparison, I have an indication that Lloyds shares may be cheap at current levels.
Aside from these ratios, the business is in a strong financial position, with a total cash balance of around £171bn. In addition, debt stands at a manageable £140bn.
Considering that the shares may provide a bargain opportunity and the company is solid financially, I’m very attracted to this firm.
Rising interest rates
Last week, inflation moved above 10% in the UK. What this potentially means is that the Bank of England will move interest rates higher in order to get the inflation under control.
Interest rates are currently at 1.75%, and they may move higher still. This could be good news for Lloyds, because interest rates largely determine how much banks can charge for providing loans and mortgages.
To that end, the bank may be able to derive greater profit from its loan services. Bank of America reacted positively to the news of rising interest rates. It increased its price target for Lloyds stock to 60p. So, the share price may well climb higher in the coming months from the current 44p.
Of course, while higher interest rates may provide an opportunity, they could also be a double-edged sword. Although profit margins may be greater, expensive borrowing may put potential customers off loans and mortgages completely. They might be unable to afford the payments as the cost-of-living crisis bites.
Furthermore, there’s the possibility that those currently paying back loans may be unable to keep up with payments. This could dent future balance sheets.
Nevertheless, Lloyds’ financial state appears to be strong and I’m quite confident that the business could weather any storms that may come its way in the short term.
Overall, the broader economic environment may benefit the company. In addition, its cash balance and debt are both healthy. What makes Lloyds shares most appealing to me, however, is that they may be cheap. It’s for this reason that I’ll add them to my portfolio soon and I’ll hold them for the long term.
