This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll look at Bank of Marin Bancorp’s (NASDAQ:BMRC) P/E ratio and reflect on what it tells us about the company’s share price. Based on the last twelve months, Bank of Marin Bancorp’s P/E ratio is 24.27. That means that at current prices, buyers pay $24.27 for every $1 in trailing yearly profits.
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Bank of Marin Bancorp:
P/E of 24.27 = $42.85 ÷ $1.77 (Based on the year to September 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each $1 of company earnings. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
How Growth Rates Impact P/E Ratios
Companies that shrink earnings per share quickly will rapidly decrease the ‘E’ in the equation. That means unless the share price falls, the P/E will increase in a few years. Then, a higher P/E might scare off shareholders, pushing the share price down.
Bank of Marin Bancorp increased earnings per share by 4.8% last year. And it has bolstered its earnings per share by 2.9% per year over the last five years. Unfortunately, earnings per share are down 1.5% a year, over 3 years.
How Does Bank of Marin Bancorp’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that Bank of Marin Bancorp has a higher P/E than the average (14.5) P/E for companies in the banks industry.
That means that the market expects Bank of Marin Bancorp will outperform other companies in its industry. The market is optimistic about the future, but that doesn’t guarantee future growth. So investors should delve deeper. I like to check if company insiders have been buying or selling.
Remember: P/E Ratios Don’t Consider The Balance Sheet
Don’t forget that the P/E ratio considers market capitalization. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).
Bank of Marin Bancorp’s Balance Sheet
The extra options and safety that comes with Bank of Marin Bancorp’s US$137m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.
The Verdict On Bank of Marin Bancorp’s P/E Ratio
Bank of Marin Bancorp’s P/E is 24.3 which is above average (16.4) in the US market. EPS was up modestly better over the last twelve months. And the healthy balance sheet means the company can sustain growth while the P/E suggests shareholders think it will.
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.’ So this free report on the analyst consensus forecasts could help you make a master move on this stock.
Of course you might be able to find a better stock than Bank of Marin Bancorp. So you may wish to see this free collection of other companies that have grown earnings strongly.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.