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How Does Bankwell Financial Group's (NASDAQ:BWFG) P/E Compare To Its Industry, After The Share Price Drop?

Simply Wall St
·4 min read

To the annoyance of some shareholders, Bankwell Financial Group (NASDAQ:BWFG) shares are down a considerable 31% in the last month. That drop has capped off a tough year for shareholders, with the share price down 31% in that time.

All else being equal, a share price drop should make a stock more 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). So, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. 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 implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.

Check out our latest analysis for Bankwell Financial Group

Does Bankwell Financial Group Have A Relatively High Or Low P/E For Its Industry?

Bankwell Financial Group's P/E of 8.62 indicates relatively low sentiment towards the stock. The image below shows that Bankwell Financial Group has a lower P/E than the average (10.4) P/E for companies in the banks industry.

NasdaqGM:BWFG Price Estimation Relative to Market, March 12th 2020
NasdaqGM:BWFG Price Estimation Relative to Market, March 12th 2020

This suggests that market participants think Bankwell Financial Group will underperform other companies in its industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. You should delve deeper. I like to check if company insiders have been buying or selling.

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. That means unless the share price increases, the P/E will reduce in a few years. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

Bankwell Financial Group's earnings per share grew by -4.2% in the last twelve months. And earnings per share have improved by 24% annually, over the last five years.

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

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. So it won't reflect the advantage of cash, or disadvantage of debt. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

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.

How Does Bankwell Financial Group's Debt Impact Its P/E Ratio?

Net debt totals 73% of Bankwell Financial Group'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 Bankwell Financial Group's P/E Ratio

Bankwell Financial Group's P/E is 8.6 which is below average (14.7) in the US market. The meaningful debt load is probably contributing to low expectations, even though it has improved earnings recently. Given Bankwell Financial Group's P/E ratio has declined from 12.4 to 8.6 in the last month, we know for sure that the market is more worried about the business today, than it was back then. 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.

Investors have an opportunity when market expectations about a stock are wrong. 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.

But note: Bankwell Financial Group may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio 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.