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Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll look at Northfield Bancorp, Inc. (Staten Island, NY)'s (NASDAQ:NFBK) P/E ratio and reflect on what it tells us about the company's share price. Based on the last twelve months, Northfield Bancorp (Staten Island NY)'s P/E ratio is 12.08. That means that at current prices, buyers pay $12.08 for every $1 in trailing yearly profits.
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Northfield Bancorp (Staten Island NY):
P/E of 12.08 = $10.390 ÷ $0.860 (Based on the trailing twelve months to December 2019.)
(Note: the above calculation results may not be precise due to rounding.)
Is A High P/E Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each $1 of company earnings. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
Does Northfield Bancorp (Staten Island NY) Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company. As you can see below, Northfield Bancorp (Staten Island NY) has a higher P/E than the average company (10.3) in the mortgage industry.
Northfield Bancorp (Staten Island NY)'s P/E tells us that market participants think the company will perform better than its industry peers, going forward. 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.
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. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
Northfield Bancorp (Staten Island NY) maintained roughly steady earnings over the last twelve months. But over the longer term (5 years) earnings per share have increased by 16%.
Remember: P/E Ratios Don't Consider The Balance Sheet
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. Thus, the metric does not reflect cash or debt held by the company. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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.
Is Debt Impacting Northfield Bancorp (Staten Island NY)'s P/E?
Net debt totals a substantial 137% of Northfield Bancorp (Staten Island NY)'s market cap. This is a relatively high level of debt, so the stock probably deserves a relatively low P/E ratio. Keep that in mind when comparing it to other companies.
The Bottom Line On Northfield Bancorp (Staten Island NY)'s P/E Ratio
Northfield Bancorp (Staten Island NY) has a P/E of 12.1. That's around the same as the average in the US market, which is 12.5. With relatively high debt, and no earnings per share growth over twelve months, the P/E suggests that many have an expectation that company will find some growth.
Investors have an opportunity when market expectations about a stock are wrong. 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 report on the analyst consensus forecasts could help you make a master move on this stock.
Of course you might be able to find a better stock than Northfield Bancorp (Staten Island NY). So you may wish to see this free collection of other companies that have grown earnings strongly.
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.
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.