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How Does First Choice Bancorp's (NASDAQ:FCBP) P/E Compare To Its Industry, After The Share Price Drop?

To the annoyance of some shareholders, First Choice Bancorp (NASDAQ:FCBP) shares are down a considerable 35% in the last month. The recent drop has obliterated the annual return, with the share price now down 29% over that longer period.

Assuming nothing else has changed, a lower share price makes a stock more attractive to potential buyers. 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. The implication here is that long term investors have an opportunity when expectations of a company are too low. 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 ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.

Check out our latest analysis for First Choice Bancorp

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

First Choice Bancorp's P/E of 6.72 indicates relatively low sentiment towards the stock. The image below shows that First Choice Bancorp has a lower P/E than the average (9.7) P/E for companies in the banks industry.

NasdaqCM:FCBP Price Estimation Relative to Market, March 13th 2020
NasdaqCM:FCBP Price Estimation Relative to Market, March 13th 2020

Its relatively low P/E ratio indicates that First Choice Bancorp shareholders think it will struggle to do as well as other companies in its industry classification. Many investors like to buy stocks when the market is pessimistic about their prospects. 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

Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. And in that case, the P/E ratio itself will drop rather quickly. Then, a lower P/E should attract more buyers, pushing the share price up.

It's nice to see that First Choice Bancorp grew EPS by a stonking 43% in the last year. And earnings per share have improved by 21% annually, over the last five years. With that performance, I would expect it to have an above average P/E ratio.

Remember: P/E Ratios Don't Consider The Balance Sheet

Don't forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. 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 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.

How Does First Choice Bancorp's Debt Impact Its P/E Ratio?

First Choice Bancorp has net cash of US$68m. This is fairly high at 36% of its market capitalization. That might mean balance sheet strength is important to the business, but should also help push the P/E a bit higher than it would otherwise be.

The Bottom Line On First Choice Bancorp's P/E Ratio

First Choice Bancorp trades on a P/E ratio of 6.7, which is below the US market average of 13.3. The net cash position gives plenty of options to the business, and the recent improvement in EPS is good to see. The relatively low P/E ratio implies the market is pessimistic. What can be absolutely certain is that the market has become more pessimistic about First Choice Bancorp over the last month, with the P/E ratio falling from 10.3 back then to 6.7 today. For those who prefer invest in growth, this stock apparently offers limited promise, but the deep value investors may find the pessimism around this stock enticing.

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 visual report on analyst forecasts could hold the key to an excellent investment decision.

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.

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