This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll show how you can use BCB Bancorp Inc’s (NASDAQ:BCBP) P/E ratio to inform your assessment of the investment opportunity. BCB Bancorp has a P/E ratio of 15, based on the last twelve months. That means that at current prices, buyers pay $15 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 BCB Bancorp:
P/E of 15 = $11.76 ÷ $0.78 (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. All else being equal, it’s better to pay a low price — but as Warren Buffett said, ‘It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.’
How Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. Earnings growth means that in the future the ‘E’ will be higher. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. Then, a lower P/E should attract more buyers, pushing the share price up.
BCB Bancorp’s earnings per share fell by 14% in the last twelve months. But over the longer term (3 years), earnings per share have increased by 7.0%. And EPS is down 5.7% a year, over the last 5 years. This might lead to muted expectations.
How Does BCB Bancorp’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. As you can see below BCB Bancorp has a P/E ratio that is fairly close for the average for the banks industry, which is 15.7.
Its P/E ratio suggests that BCB Bancorp shareholders think that in the future it will perform about the same as other companies in its industry classification. So if BCB Bancorp actually outperforms its peers going forward, that should be a positive for the share price. I inform my view byby checking management tenure and remuneration, among other things.
Remember: P/E Ratios Don’t Consider The Balance Sheet
The ‘Price’ in P/E reflects the market capitalization of the company. That means it doesn’t take debt or cash into account. Theoretically, a business can improve its earnings (and produce a lower P/E in the future), by taking on debt (or spending its remaining cash).
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
Is Debt Impacting BCB Bancorp’s P/E?
BCB Bancorp’s net debt is 56% of its market cap. If you want to compare its P/E ratio to other companies, you should absolutely keep in mind it has significant borrowings.
The Verdict On BCB Bancorp’s P/E Ratio
BCB Bancorp has a P/E of 15. That’s below the average in the US market, which is 17.9. The P/E reflects market pessimism that probably arises from the lack of recent EPS growth, paired with significant leverage.
Investors have an opportunity when market expectations about a stock are wrong. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free visual report on analyst forecasts could hold they key to an excellent investment decision.
You might be able to find a better buy than BCB Bancorp. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
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.