This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll look at Southern Missouri Bancorp, Inc.'s (NASDAQ:SMBC) P/E ratio and reflect on what it tells us about the company's share price. Southern Missouri Bancorp has a P/E ratio of 11.26, based on the last twelve months. That corresponds to an earnings yield of approximately 8.9%.
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Southern Missouri Bancorp:
P/E of 11.26 = $33.35 ÷ $2.96 (Based on the year to March 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 necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
How Does Southern Missouri Bancorp's P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. If you look at the image below, you can see Southern Missouri Bancorp has a lower P/E than the average (13.9) in the mortgage industry classification.
Its relatively low P/E ratio indicates that Southern Missouri Bancorp shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Southern Missouri Bancorp, it's quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and 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. And in that case, the P/E ratio itself will drop rather quickly. Then, a lower P/E should attract more buyers, pushing the share price up.
Southern Missouri Bancorp increased earnings per share by a whopping 31% last year. And its annual EPS growth rate over 5 years is 15%. I'd therefore be a little surprised if its P/E ratio was not relatively high.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. That means it doesn't take debt or cash into account. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.
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 Southern Missouri Bancorp's P/E?
Net debt totals just 9.3% of Southern Missouri Bancorp's market cap. It would probably trade on a higher P/E ratio if it had a lot of cash, but I doubt it is having a big impact.
The Bottom Line On Southern Missouri Bancorp's P/E Ratio
Southern Missouri Bancorp trades on a P/E ratio of 11.3, which is below the US market average of 17.5. The company does have a little debt, and EPS growth was good last year. If the company can continue to grow earnings, then the current P/E may be unjustifiably low.
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 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 find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
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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. Thank you for reading.