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What Is Bank of Commerce Holdings's (NASDAQ:BOCH) P/E Ratio After Its Share Price Tanked?

Simply Wall St
·4 mins read

Unfortunately for some shareholders, the Bank of Commerce Holdings (NASDAQ:BOCH) share price has dived 38% in the last thirty days. That drop has capped off a tough year for shareholders, with the share price down 35% in that time.

All else being equal, a share price drop should make a stock more attractive to potential investors. 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 long term investors have an opportunity when expectations of a company are too low. One way to gauge market expectations of a stock 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.

View our latest analysis for Bank of Commerce Holdings

Does Bank of Commerce Holdings Have A Relatively High Or Low P/E For Its Industry?

Bank of Commerce Holdings's P/E is 8.43. You can see in the image below that the average P/E (8.9) for companies in the banks industry is roughly the same as Bank of Commerce Holdings's P/E.

NasdaqGM:BOCH Price Estimation Relative to Market, March 19th 2020
NasdaqGM:BOCH Price Estimation Relative to Market, March 19th 2020

That indicates that the market expects Bank of Commerce Holdings will perform roughly in line with other companies in its industry. If the company has better than average prospects, then the market might be underestimating it. Further research into factors such as insider buying and selling, could help you form your own view on whether that is likely.

How Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. That means even if the current P/E is high, it will reduce over time if the share price stays flat. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

Bank of Commerce Holdings saw earnings per share decrease by 14% last year. But EPS is up 15% over the last 5 years.

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

The 'Price' in P/E reflects the market capitalization of the company. So it won't reflect the advantage of cash, or disadvantage of debt. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.

Is Debt Impacting Bank of Commerce Holdings's P/E?

Bank of Commerce Holdings has net cash of US$58m. This is fairly high at 47% of its market capitalization. That might mean balance sheet strength is important to the business, but should also help push the P/E a bit higher than it would otherwise be.

The Verdict On Bank of Commerce Holdings's P/E Ratio

Bank of Commerce Holdings's P/E is 8.4 which is below average (11.8) in the US market. The recent drop in earnings per share would almost certainly temper expectations, the healthy balance sheet means the company retains potential for future growth. If that occurs, the current low P/E could prove to be temporary. What can be absolutely certain is that the market has become more pessimistic about Bank of Commerce Holdings over the last month, with the P/E ratio falling from 13.6 back then to 8.4 today. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for deep value investors this stock might justify some research.

Investors have an opportunity when market expectations about a stock are wrong. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.

But note: Bank of Commerce Holdings 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.