Unfortunately for some shareholders, the Ringkjøbing Landbobank (CPH:RILBA) share price has dived 34% in the last thirty days. Even longer term holders have taken a real hit with the stock declining 16% in the last year.
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.
Does Ringkjøbing Landbobank Have A Relatively High Or Low P/E For Its Industry?
We can tell from its P/E ratio of 10.06 that there is some investor optimism about Ringkjøbing Landbobank. As you can see below, Ringkjøbing Landbobank has a higher P/E than the average company (5.5) in the banks industry.
Ringkjøbing Landbobank's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Clearly the market expects growth, but it isn't guaranteed. So investors 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. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. That means unless the share price increases, the P/E will reduce in a few years. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
It's nice to see that Ringkjøbing Landbobank grew EPS by a stonking 33% in the last year. And it has bolstered its earnings per share by 12% per year 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
The 'Price' in P/E reflects the market capitalization of the company. 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).
While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.
Is Debt Impacting Ringkjøbing Landbobank's P/E?
Ringkjøbing Landbobank has net debt worth 60% of its market capitalization. This is a reasonably significant level of debt -- all else being equal you'd expect a much lower P/E than if it had net cash.
The Verdict On Ringkjøbing Landbobank's P/E Ratio
Ringkjøbing Landbobank's P/E is 10.1 which is below average (11.4) in the DK market. The company has a meaningful amount of debt on the balance sheet, but that should not eclipse the solid earnings growth. If it continues to grow, then the current low P/E may prove to be unjustified. What can be absolutely certain is that the market has become significantly less optimistic about Ringkjøbing Landbobank over the last month, with the P/E ratio falling from 15.2 back then to 10.1 today. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for a contrarian, it may signal opportunity.
When the market is wrong about a stock, it gives savvy investors an opportunity. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free report on the analyst consensus forecasts could help you make a master move on this stock.
But note: Ringkjøbing Landbobank 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).
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