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Does Byline Bancorp, Inc.'s (NYSE:BY) P/E Ratio Signal A Buying Opportunity?

Simply Wall St

The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at Byline Bancorp, Inc.'s (NYSE:BY) P/E ratio and reflect on what it tells us about the company's share price. Based on the last twelve months, Byline Bancorp's P/E ratio is 10.8. That means that at current prices, buyers pay $10.8 for every $1 in trailing yearly profits.

See our latest analysis for Byline Bancorp

How Do You Calculate A P/E Ratio?

The formula for P/E is:

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

Or for Byline Bancorp:

P/E of 10.8 = $16.8 ÷ $1.56 (Based on the year to June 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 necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.

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

The P/E ratio essentially measures market expectations of a company. We can see in the image below that the average P/E (12.1) for companies in the banks industry is higher than Byline Bancorp's P/E.

NYSE:BY Price Estimation Relative to Market, September 5th 2019
NYSE:BY Price Estimation Relative to Market, September 5th 2019

Its relatively low P/E ratio indicates that Byline Bancorp shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Byline Bancorp, it's quite possible it could surprise on the upside. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.

How Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. 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.

In the last year, Byline Bancorp grew EPS like Taylor Swift grew her fan base back in 2010; the 162% gain was both fast and well deserved.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

The 'Price' in P/E reflects the market capitalization of the company. Thus, the metric does not reflect cash or debt held by the company. 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.

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

Net debt totals 75% of Byline Bancorp'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 Verdict On Byline Bancorp's P/E Ratio

Byline Bancorp has a P/E of 10.8. That's below the average in the US market, which is 17.3. While the EPS growth last year was strong, the significant debt levels reduce the number of options available to management. If it continues to grow, then the current low P/E may prove to be unjustified.

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 report on the analyst consensus forecasts could help you make a master move on this stock.

But note: Byline Bancorp 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).

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.