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Does IF Bancorp, Inc.'s (NASDAQ:IROQ) P/E Ratio Signal A Buying Opportunity?

Simply Wall St

IF Bancorp (NASDAQ:IROQ) shares have retraced a considerable in the last month. But there's still good reason for shareholders to be content; the stock has gained 5.8% in the last 90 days. The stock has been solid, longer term, gaining 11% in the last year.

All else being equal, a sharp share price increase should make a stock less attractive to potential investors. 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 implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.

See our latest analysis for IF Bancorp

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

IF Bancorp's P/E of 20.64 indicates some degree of optimism towards the stock. The image below shows that IF Bancorp has a higher P/E than the average (14.2) P/E for companies in the mortgage industry.

NasdaqCM:IROQ Price Estimation Relative to Market, January 12th 2020

IF Bancorp's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Shareholders are clearly optimistic, but the future is always uncertain. So investors should delve deeper. I like to check if company insiders have been buying or selling.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. When earnings grow, the 'E' increases, over time. And in that case, the P/E ratio itself will drop rather quickly. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

In the last year, IF Bancorp grew EPS like Taylor Swift grew her fan base back in 2010; the 136% gain was both fast and well deserved.

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. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.

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.

Is Debt Impacting IF Bancorp's P/E?

Net debt is 30% of IF Bancorp's market cap. While that's enough to warrant consideration, it doesn't really concern us.

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

IF Bancorp's P/E is 20.6 which is above average (18.7) in its market. Its debt levels do not imperil its balance sheet and its EPS growth is very healthy indeed. So on this analysis a high P/E ratio seems reasonable. What can be absolutely certain is that the market has become less optimistic about IF Bancorp over the last month, with the P/E ratio falling from 20.6 back then to 20.6 today. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for a contrarian, it may signal opportunity.

Investors should be looking to buy stocks that the market is wrong about. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. We don't have analyst forecasts, but you might want to assess this data-rich visualization of earnings, revenue and cash flow.

You might be able to find a better buy than IF 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.