This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll show how you can use TriCo Bancshares’s (NASDAQ:TCBK) P/E ratio to inform your assessment of the investment opportunity. TriCo Bancshares has a price to earnings ratio of 15.66, based on the last twelve months. In other words, at today’s prices, investors are paying $15.66 for every $1 in prior year profit.
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 TriCo Bancshares:
P/E of 15.66 = $40.22 ÷ $2.57 (Based on the year to December 2018.)
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. 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. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
TriCo Bancshares increased earnings per share by a whopping 45% last year. And its annual EPS growth rate over 5 years is 7.1%. I’d therefore be a little surprised if its P/E ratio was not relatively high.
How Does TriCo Bancshares’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. You can see in the image below that the average P/E (13.6) for companies in the banks industry is lower than TriCo Bancshares’s P/E.
That means that the market expects TriCo Bancshares will outperform other companies in its industry. Clearly the market expects growth, but it isn’t guaranteed. So further research is always essential. I often monitor director buying and selling.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
Don’t forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
Is Debt Impacting TriCo Bancshares’s P/E?
The extra options and safety that comes with TriCo Bancshares’s US$155m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.
The Verdict On TriCo Bancshares’s P/E Ratio
TriCo Bancshares trades on a P/E ratio of 15.7, which is below the US market average of 17.6. Not only should the net cash position reduce risk, but the recent growth has been impressive. The relatively low P/E ratio implies the market is pessimistic. Given analysts are expecting further growth, one I would have expected a higher P/E ratio. So this stock may well be worth further research.
When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
But note: TriCo Bancshares 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 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. Thank you for reading.