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What Is Cortland Bancorp's (NASDAQ:CLDB) P/E Ratio After Its Share Price Tanked?

Simply Wall St
·4 mins read

Unfortunately for some shareholders, the Cortland Bancorp (NASDAQ:CLDB) share price has dived 36% in the last thirty days. That drop has capped off a tough year for shareholders, with the share price down 41% in that time.

Assuming nothing else has changed, a lower share price makes a stock more 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 long term investors have an opportunity when expectations of a company are too low. 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 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 Cortland Bancorp

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

Cortland Bancorp's P/E is 8.36. The image below shows that Cortland Bancorp has a P/E ratio that is roughly in line with the banks industry average (8.9).

NasdaqCM:CLDB Price Estimation Relative to Market March 28th 2020
NasdaqCM:CLDB Price Estimation Relative to Market March 28th 2020

That indicates that the market expects Cortland Bancorp will perform roughly in line with other companies in its industry. The company could surprise by performing better than average, in the future. I would further inform my view by checking insider buying and selling., among other things.

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. And in that case, the P/E ratio itself will drop rather quickly. Then, a lower P/E should attract more buyers, pushing the share price up.

Cortland Bancorp's earnings per share fell by 17% in the last twelve months. But it has grown its earnings per share by 14% per year over the last five years.

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. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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 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.

So What Does Cortland Bancorp's Balance Sheet Tell Us?

Cortland Bancorp's net debt is 16% of its market cap. It would probably deserve a higher P/E ratio if it was net cash, since it would have more options for growth.

The Verdict On Cortland Bancorp's P/E Ratio

Cortland Bancorp trades on a P/E ratio of 8.4, which is below the US market average of 13.0. The debt levels are not a major concern, but the lack of EPS growth is likely weighing on sentiment. What can be absolutely certain is that the market has become more pessimistic about Cortland Bancorp over the last month, with the P/E ratio falling from 13.1 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.

When the market is wrong about a stock, it gives savvy investors an opportunity. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. We don't have analyst forecasts, but you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E 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.