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 Home Bancshares, Inc. (Conway, AR)'s (NASDAQ:HOMB) P/E ratio to inform your assessment of the investment opportunity. Home Bancshares (Conway AR) has a P/E ratio of 10.84, based on the last twelve months. In other words, at today's prices, investors are paying $10.84 for every $1 in prior year profit.
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 Home Bancshares (Conway AR):
P/E of 10.84 = $18.38 ÷ $1.70 (Based on the year to September 2019.)
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 a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business's prospects, relative to stocks with a lower P/E.
Does Home Bancshares (Conway AR) Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company. The image below shows that Home Bancshares (Conway AR) has a lower P/E than the average (12.6) P/E for companies in the banks industry.
Home Bancshares (Conway AR)'s P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with Home Bancshares (Conway AR), it's quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or selling.
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. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
It's great to see that Home Bancshares (Conway AR) grew EPS by 17% in the last year. And its annual EPS growth rate over 5 years is 18%. With that performance, you 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. So it won't reflect the advantage of cash, or disadvantage of debt. 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.
Home Bancshares (Conway AR)'s Balance Sheet
Net debt is 27% of Home Bancshares (Conway AR)'s market cap. You'd want to be aware of this fact, but it doesn't bother us.
The Bottom Line On Home Bancshares (Conway AR)'s P/E Ratio
Home Bancshares (Conway AR) has a P/E of 10.8. That's below the average in the US market, which is 18.2. The EPS growth last year was strong, and debt levels are quite reasonable. If it continues to grow, then the current low P/E may prove to be unjustified.
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.
But note: Home Bancshares (Conway AR) 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 firstname.lastname@example.org. 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.