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What Does Citizens Holding Company's (NASDAQ:CIZN) P/E Ratio Tell You?

Simply Wall St

This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll show how you can use Citizens Holding Company's (NASDAQ:CIZN) P/E ratio to inform your assessment of the investment opportunity. Looking at earnings over the last twelve months, Citizens Holding has a P/E ratio of 17.23. That is equivalent to an earnings yield of about 5.8%.

View our latest analysis for Citizens Holding

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 Citizens Holding:

P/E of 17.23 = $20.45 ÷ $1.19 (Based on the year to June 2019.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that buyers have to pay a higher price for each $1 the company has earned over the last year. 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 Citizens Holding's P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that Citizens Holding has a higher P/E than the average (12.2) P/E for companies in the banks industry.

NasdaqGM:CIZN Price Estimation Relative to Market, August 16th 2019

That means that the market expects Citizens Holding will outperform other companies in its industry. The market is optimistic about the future, but that doesn't guarantee future growth. So investors should delve deeper. I like to check if company insiders have been buying or selling.

How Growth Rates Impact P/E Ratios

Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. Then, a higher P/E might scare off shareholders, pushing the share price down.

Citizens Holding increased earnings per share by a whopping 47% last year. Unfortunately, earnings per share are down 6.3% a year, over 5 years.

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

Don't forget that the P/E ratio considers market capitalization. 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).

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 Citizens Holding's Debt Impact Its P/E Ratio?

Citizens Holding has net debt worth 76% of its market capitalization. If you want to compare its P/E ratio to other companies, you should absolutely keep in mind it has significant borrowings.

The Bottom Line On Citizens Holding's P/E Ratio

Citizens Holding trades on a P/E ratio of 17.2, which is fairly close to the US market average of 17. It does have enough debt to add risk, although earnings growth was strong in the last year. The P/E suggests the market isn't confident that growth will be sustained, though.

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 could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.

But note: Citizens Holding 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.