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Despite Its High P/E Ratio, Is Origin Bancorp, Inc. (NASDAQ:OBNK) Still Undervalued?

Simply Wall St

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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll look at Origin Bancorp, Inc.'s (NASDAQ:OBNK) P/E ratio and reflect on what it tells us about the company's share price. Looking at earnings over the last twelve months, Origin Bancorp has a P/E ratio of 15.37. That means that at current prices, buyers pay $15.37 for every $1 in trailing yearly profits.

View our latest analysis for Origin Bancorp

How Do I Calculate A Price To Earnings Ratio?

The formula for price to earnings is:

Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)

Or for Origin Bancorp:

P/E of 15.37 = $34.1 ÷ $2.22 (Based on the trailing twelve months to March 2019.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that buyers have to pay a higher price for each $1 the company has earned over the last year. That isn't a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business's prospects, relative to stocks with a lower P/E.

Does Origin Bancorp Have A Relatively High Or Low P/E For Its Industry?

The P/E ratio essentially measures market expectations of a company. You can see in the image below that the average P/E (12.8) for companies in the banks industry is lower than Origin Bancorp's P/E.

NasdaqGS:OBNK Price Estimation Relative to Market, July 11th 2019

Its relatively high P/E ratio indicates that Origin 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 investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

In the last year, Origin Bancorp grew EPS like Taylor Swift grew her fan base back in 2010; the 174% gain was both fast and well deserved. The sweetener is that the annual five year growth rate of 37% is also impressive. So I'd be surprised if the P/E ratio was not above average.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

The 'Price' in P/E reflects the market capitalization of the company. That means it doesn't take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.

Is Debt Impacting Origin Bancorp's P/E?

Net debt is 28% of Origin Bancorp's market cap. You'd want to be aware of this fact, but it doesn't bother us.

The Bottom Line On Origin Bancorp's P/E Ratio

Origin Bancorp's P/E is 15.4 which is below average (18) in the US market. The company does have a little debt, and EPS growth was good last year. If the company can continue to grow earnings, then the current P/E may be unjustifiably low. Given analysts are expecting further growth, one might have expected a higher P/E ratio. That may be worth further research.

When the market is wrong about a stock, it gives savvy investors an opportunity. 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 visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.

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.

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.

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. Thank you for reading.