What Does CBTX, Inc.’s (NASDAQ:CBTX) P/E Ratio Tell You?
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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 show how you can use CBTX, Inc.’s (NASDAQ:CBTX) P/E ratio to inform your assessment of the investment opportunity. CBTX has a P/E ratio of 17.76, based on the last twelve months. In other words, at today’s prices, investors are paying $17.76 for every $1 in prior year profit.
View our latest analysis for CBTX
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for CBTX:
P/E of 17.76 = $33.78 ÷ $1.9 (Based on the trailing twelve months to December 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each $1 of company 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 Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the ‘E’ will be higher. That means unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.
CBTX increased earnings per share by a whopping 55% last year. And it has improved its earnings per share by 13% per year over the last three years. So we’d generally expect it to have a relatively high P/E ratio.
How Does CBTX’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. As you can see below, CBTX has a higher P/E than the average company (13.5) in the banks industry.
Its relatively high P/E ratio indicates that CBTX shareholders think it will perform better than other companies in its industry classification. The market is optimistic about the future, but that doesn’t guarantee future growth. 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
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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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 CBTX’s P/E?
Since CBTX holds net cash of US$378m, it can spend on growth, justifying a higher P/E ratio than otherwise.
The Verdict On CBTX’s P/E Ratio
CBTX has a P/E of 17.8. That’s around the same as the average in the US market, which is 17.4. With a strong balance sheet combined with recent growth, the P/E implies the market is quite pessimistic.
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 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.
