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Does Emclaire Financial Corp's (NASDAQ:EMCF) P/E Ratio Signal A Buying Opportunity?

Simply Wall St

To the annoyance of some shareholders, Emclaire Financial (NASDAQ:EMCF) shares are down a considerable in the last month. Even longer term holders have taken a real hit with the stock declining 4.4% in the last year.

All else being equal, a sharp share price increase should make a stock less attractive to potential investors. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. So some would prefer to hold off buying when there is a lot of optimism towards a stock. 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.

View our latest analysis for Emclaire Financial

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

Emclaire Financial has a P/E ratio of 13.13. As you can see below Emclaire Financial has a P/E ratio that is fairly close for the average for the banks industry, which is 12.7.

NasdaqCM:EMCF Price Estimation Relative to Market, November 30th 2019
NasdaqCM:EMCF Price Estimation Relative to Market, November 30th 2019

That indicates that the market expects Emclaire Financial will perform roughly in line with other companies in its industry. So if Emclaire Financial actually outperforms its peers going forward, that should be a positive for the share price. Further research into factors such as insider buying and selling, could help you form your own view on whether that is likely.

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. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

It's great to see that Emclaire Financial grew EPS by 21% in the last year. And it has bolstered its earnings per share by 3.7% per year over the last five years. So one might expect an above average P/E ratio.

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.

Emclaire Financial's Balance Sheet

With net cash of US$26m, Emclaire Financial has a very strong balance sheet, which may be important for its business. Having said that, at 30% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.

The Bottom Line On Emclaire Financial's P/E Ratio

Emclaire Financial's P/E is 13.1 which is below average (18.4) in the US market. The net cash position gives plenty of options to the business, and the recent improvement in EPS is good to see. The below average P/E ratio suggests that market participants don't believe the strong growth will continue. Given Emclaire Financial's P/E ratio has declined from 13.1 to 13.1 in the last month, we know for sure that the market is less confident about the business today, than it was back then. For those who don't like to trade against momentum, that could be a warning sign, but a contrarian investor might want to take a closer look.

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. Although we don't have analyst forecasts you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.

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.

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.