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Do You Like Bancorp 34, Inc. (NASDAQ:BCTF) At This P/E Ratio?

Simply Wall St

Unfortunately for some shareholders, the Bancorp 34 (NASDAQ:BCTF) share price has dived in the last thirty days. Indeed, the recent drop has reduced the annual gain to a relatively sedate 8.2% over the last twelve months.

Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. The implication here is that deep value investors might steer clear when expectations of a company are too high. Perhaps the simplest way to get a read on investors' expectations of a business is to look at its Price to Earnings Ratio (PE Ratio). A high P/E implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.

Check out our latest analysis for Bancorp 34

How Does Bancorp 34's P/E Ratio Compare To Its Peers?

We can tell from its P/E ratio of 57.90 that there is some investor optimism about Bancorp 34. The image below shows that Bancorp 34 has a significantly higher P/E than the average (14.6) P/E for companies in the mortgage industry.

NasdaqCM:BCTF Price Estimation Relative to Market, December 22nd 2019

Its relatively high P/E ratio indicates that Bancorp 34 shareholders think it will perform better than other companies in its industry classification. The market is optimistic about the future, but that doesn't guarantee future growth. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

How Growth Rates Impact P/E Ratios

Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. When earnings grow, the 'E' increases, over time. That means even if the current P/E is high, it will reduce over time if the share price stays flat. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Bancorp 34 shrunk earnings per share by 12% over the last year. But EPS is up 2.4% over the last 3 years. And over the longer term (5 years) earnings per share have decreased 27% annually. This might lead to muted expectations.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. Thus, the metric does not reflect cash or debt held by the company. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.

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 Bancorp 34's P/E?

Bancorp 34 has net debt worth 54% of its market capitalization. This is a reasonably significant level of debt -- all else being equal you'd expect a much lower P/E than if it had net cash.

The Verdict On Bancorp 34's P/E Ratio

With a P/E ratio of 57.9, Bancorp 34 is expected to grow earnings very strongly in the years to come. With significant debt and no EPS growth last year, shareholders are betting on an improvement in earnings from the company. Given Bancorp 34's P/E ratio has declined from 57.9 to 57.9 in the last month, we know for sure that the market is less confident about the business today, than it was back then. For those who don't like to trade against momentum, that could be a warning sign, but a contrarian investor might want to take a closer look.

When the market is wrong about a stock, it gives savvy investors an opportunity. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine. We don't have analyst forecasts, but shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.

But note: Bancorp 34 may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

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.