The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). To keep it practical, we’ll show how Auburn National Bancorporation Inc’s (NASDAQ:AUBN) P/E ratio could help you assess the value on offer. Auburn National Bancorporation has a price to earnings ratio of 17.03, based on the last twelve months. That means that at current prices, buyers pay $17.03 for every $1 in trailing yearly profits.
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 Auburn National Bancorporation:
P/E of 17.03 = $38.6 ÷ $2.27 (Based on the trailing twelve months to September 2018.)
Is A High P/E Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
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 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.
Auburn National Bancorporation maintained roughly steady earnings over the last twelve months. But over the longer term (5 years) earnings per share have increased by 3.1%.
How Does Auburn National Bancorporation’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that Auburn National Bancorporation has a higher P/E than the average (15.3) P/E for companies in the banks industry.
Its relatively high P/E ratio indicates that Auburn National Bancorporation shareholders think it will perform better than other companies in its industry classification. Shareholders are clearly optimistic, but the future is always uncertain. 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
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 taking on debt (or spending its remaining cash).
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).
Auburn National Bancorporation’s Balance Sheet
The extra options and safety that comes with Auburn National Bancorporation’s US$65m 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 Auburn National Bancorporation’s P/E Ratio
Auburn National Bancorporation trades on a P/E ratio of 17, which is fairly close to the US market average of 17.5. EPS was up modestly better over the last twelve months. Also positive, the relatively strong balance sheet will allow for investment in growth. If this occurs the current P/E might prove to signify undervaluation.
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. We don’t have analyst forecasts, but you might want to assess this data-rich visualization of earnings, revenue and cash flow.
Of course you might be able to find a better stock than Auburn National Bancorporation. So you may wish to see this free collection of other companies that have grown earnings strongly.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.