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Is Citizens Community Bancorp, Inc.'s (NASDAQ:CZWI) P/E Ratio Really That Good?

Simply Wall St

Citizens Community Bancorp (NASDAQ:CZWI) shares have retraced a considerable in the last month. But there's still good reason for shareholders to be content; the stock has gained 9.2% in the last 90 days. The stock has been solid, longer term, gaining 13% in the last year.

Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. In the long term, share prices tend to follow earnings per share, but in the short term prices bounce around in response to short term factors (which are not always obvious). The implication here is that deep value investors might steer clear when expectations of a company are too high. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). A high P/E ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.

See our latest analysis for Citizens Community Bancorp

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

Citizens Community Bancorp's P/E of 21.92 indicates some degree of optimism towards the stock. You can see in the image below that the average P/E (12.9) for companies in the banks industry is lower than Citizens Community Bancorp's P/E.

NasdaqGM:CZWI Price Estimation Relative to Market, December 15th 2019

Its relatively high P/E ratio indicates that Citizens Community Bancorp shareholders think it will perform better than other companies in its industry classification. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and selling.

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. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

Citizens Community Bancorp shrunk earnings per share by 21% over the last year. But EPS is up 11% over the last 5 years.

Remember: P/E Ratios Don't Consider The Balance Sheet

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. Thus, the metric does not reflect cash or debt held by the company. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its 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.

Citizens Community Bancorp's Balance Sheet

Net debt totals 71% of Citizens Community Bancorp's market cap. 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 Bottom Line On Citizens Community Bancorp's P/E Ratio

Citizens Community Bancorp's P/E is 21.9 which is above average (18.6) in its market. With relatively high debt, and no earnings per share growth over twelve months, it's safe to say the market believes the company will improve its earnings growth in the future. What can be absolutely certain is that the market has become less optimistic about Citizens Community Bancorp over the last month, with the P/E ratio falling from 21.9 back then to 21.9 today. 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. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.

You might be able to find a better buy than Citizens Community 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).

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.