Does Southern National Bancorp of Virginia, Inc.'s (NASDAQ:SONA) P/E Ratio Signal A Buying Opportunity?
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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). To keep it practical, we'll show how Southern National Bancorp of Virginia, Inc.'s (NASDAQ:SONA) P/E ratio could help you assess the value on offer. Looking at earnings over the last twelve months, Southern National Bancorp of Virginia has a P/E ratio of 11.14. That means that at current prices, buyers pay $11.14 for every $1 in trailing yearly profits.
View our latest analysis for Southern National Bancorp of Virginia
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 Southern National Bancorp of Virginia:
P/E of 11.14 = $14.58 ÷ $1.31 (Based on the year to March 2019.)
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 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 Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means even if the current P/E is high, it will reduce over time if the share price stays flat. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
Southern National Bancorp of Virginia's earnings made like a rocket, taking off 223% last year. The cherry on top is that the five year growth rate was an impressive 19% per year. With that kind of growth rate we would generally expect a high P/E ratio.
How Does Southern National Bancorp of Virginia's P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. The image below shows that Southern National Bancorp of Virginia has a lower P/E than the average (12.6) P/E for companies in the banks industry.
Southern National Bancorp of Virginia's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Many investors like to buy stocks when the market is pessimistic about their prospects. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
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. So it won't reflect the advantage of cash, or disadvantage of debt. 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.
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).
Southern National Bancorp of Virginia's Balance Sheet
Southern National Bancorp of Virginia's net debt equates to 50% of its market capitalization. You'd want to be aware of this fact, but it doesn't bother us.
The Verdict On Southern National Bancorp of Virginia's P/E Ratio
Southern National Bancorp of Virginia's P/E is 11.1 which is below average (17.8) in the US market. The company hasn't stretched its balance sheet, and earnings growth was good last year. If it continues to grow, then the current low P/E may prove to be unjustified.
When the market is wrong about a stock, it gives savvy investors an opportunity. 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 visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.
But note: Southern National Bancorp of Virginia 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).
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.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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.
