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Despite Its High P/E Ratio, Is Southside Bancshares, Inc. (NASDAQ:SBSI) Still Undervalued?

Simply Wall St

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The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to Southside Bancshares, Inc.'s (NASDAQ:SBSI), to help you decide if the stock is worth further research. Looking at earnings over the last twelve months, Southside Bancshares has a P/E ratio of 14.94. That means that at current prices, buyers pay $14.94 for every $1 in trailing yearly profits.

View our latest analysis for Southside Bancshares

How Do You Calculate A P/E Ratio?

The formula for price to earnings is:

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

Or for Southside Bancshares:

P/E of 14.94 = $33.11 ÷ $2.22 (Based on the year to March 2019.)

Is A High P/E Ratio Good?

The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. 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.

How Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. 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. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

Southside Bancshares increased earnings per share by an impressive 25% over the last twelve months. And it has bolstered its earnings per share by 3.1% per year over the last five years. So one might expect an above average P/E ratio.

How Does Southside Bancshares's P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. You can see in the image below that the average P/E (12.7) for companies in the banks industry is lower than Southside Bancshares's P/E.

NasdaqGS:SBSI Price Estimation Relative to Market, June 13th 2019

Its relatively high P/E ratio indicates that Southside Bancshares shareholders think it will perform better than other companies in its industry classification. Clearly the market expects growth, but it isn't guaranteed. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

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. 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 investing in growth. That means taking on debt (or spending its cash).

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).

Southside Bancshares's Balance Sheet

Southside Bancshares has net debt equal to 46% of its market cap. While it's worth keeping this in mind, it isn't a worry.

The Bottom Line On Southside Bancshares's P/E Ratio

Southside Bancshares's P/E is 14.9 which is below average (17.5) in the US market. The EPS growth last year was strong, and debt levels are quite reasonable. If it continues to grow, then the current low P/E may prove to be unjustified.

Investors should be looking to buy stocks that the market is wrong about. 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 Southside Bancshares. So you may wish to see this free collection of other companies that have grown earnings strongly.

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.