Unfortunately for some shareholders, the Peoples Bancorp of North Carolina (NASDAQ:PEBK) share price has dived 35% in the last thirty days. Indeed the recent decline has arguably caused some bitterness for shareholders who have held through the 35% drop over twelve months.
All else being equal, a share price drop should make a stock more attractive to potential investors. In the long term, share prices tend to follow earnings per share, but in the short term prices bounce around in response to short term factors (which are not always obvious). 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.
How Does Peoples Bancorp of North Carolina's P/E Ratio Compare To Its Peers?
We can tell from its P/E ratio of 7.54 that sentiment around Peoples Bancorp of North Carolina isn't particularly high. The image below shows that Peoples Bancorp of North Carolina has a lower P/E than the average (8.9) P/E for companies in the banks industry.
This suggests that market participants think Peoples Bancorp of North Carolina will underperform other companies in its industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. You should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. When earnings grow, the 'E' increases, over time. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Peoples Bancorp of North Carolina saw earnings per share improve by 6.1% last year. And its annual EPS growth rate over 5 years is 9.3%.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
The 'Price' in P/E reflects the market capitalization of the company. 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 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.
Peoples Bancorp of North Carolina's Balance Sheet
Net debt totals just 0.6% of Peoples Bancorp of North Carolina's market cap. The market might award it a higher P/E ratio if it had net cash, but its unlikely this low level of net borrowing is having a big impact on the P/E multiple.
The Verdict On Peoples Bancorp of North Carolina's P/E Ratio
Peoples Bancorp of North Carolina has a P/E of 7.5. That's below the average in the US market, which is 13.6. The company does have a little debt, and EPS is moving in the right direction. The P/E ratio implies the market is cautious about longer term prospects. What can be absolutely certain is that the market has become more pessimistic about Peoples Bancorp of North Carolina over the last month, with the P/E ratio falling from 11.5 back then to 7.5 today. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for deep value investors this stock might justify some research.
Investors should be looking to buy stocks that the market is wrong about. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. We don't have analyst forecasts, but shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.
But note: Peoples Bancorp of North Carolina 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).
If you spot an error that warrants correction, please contact the editor at email@example.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.
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