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 HomeTrust Bancshares, Inc.’s (NASDAQ:HTBI) P/E ratio to inform your assessment of the investment opportunity. HomeTrust Bancshares has a price to earnings ratio of 46.91, based on the last twelve months. That is equivalent to an earnings yield of about 2.1%.
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How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for HomeTrust Bancshares:
P/E of 46.91 = $27 ÷ $0.58 (Based on the trailing twelve months to September 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 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.
How Growth Rates Impact P/E Ratios
When earnings fall, the ‘E’ decreases, over time. That means unless the share price falls, the P/E will increase in a few years. A higher P/E should indicate the stock is expensive relative to others — and that may encourage shareholders to sell.
HomeTrust Bancshares’s earnings per share fell by 25% in the last twelve months. And it has shrunk its earnings per share by 2.3% per year over the last five years. This might lead to muted expectations.
How Does HomeTrust Bancshares’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. The image below shows that HomeTrust Bancshares has a significantly higher P/E than the average (13.5) P/E for companies in the banks industry.
That means that the market expects HomeTrust Bancshares will outperform other companies in its industry. Shareholders are clearly optimistic, but the future is always uncertain. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. In other words, it does not consider any debt or cash that the company may have on the balance sheet. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).
Is Debt Impacting HomeTrust Bancshares’s P/E?
HomeTrust Bancshares’s net debt is considerable, at 113% of its market cap. This level of debt justifies a relatively low P/E, so remain cognizant of the debt, if you’re comparing it to other stocks.
The Bottom Line On HomeTrust Bancshares’s P/E Ratio
HomeTrust Bancshares’s P/E is 46.9 which is above average (16.7) in the US market. With relatively high debt, and no earnings per share growth over twelve months, it’s safe to say the market believes the company will improve its earnings growth in the future.
Investors have an opportunity when market expectations about a stock are wrong. People often underestimate remarkable growth — so investors can make money when fast growth is not fully appreciated. 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 be able to find a better stock than HomeTrust Bancshares. So you may wish to see this free collection of other companies that have grown earnings strongly.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.