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 Select Bancorp, Inc.’s (NASDAQ:SLCT) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Select Bancorp’s P/E ratio is 23.66. That means that at current prices, buyers pay $23.66 for every $1 in trailing yearly profits.
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Select Bancorp:
P/E of 23.66 = $12.31 ÷ $0.52 (Based on the year to September 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 a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business’s prospects, relative to stocks with a lower P/E.
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the ‘E’ will be lower. That means even if the current P/E is low, it will increase over time if the share price stays flat. Then, a higher P/E might scare off shareholders, pushing the share price down.
Select Bancorp saw earnings per share decrease by 11% last year. But it has grown its earnings per share by 5.3% per year over the last five years. And EPS is down 14% a year, over the last 3 years. This growth rate might warrant a low P/E ratio.
How Does Select 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. You can see in the image below that the average P/E (14.6) for companies in the banks industry is lower than Select Bancorp’s P/E.
That means that the market expects Select Bancorp will outperform other companies in its industry. Clearly the market expects growth, but it isn’t guaranteed. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
Remember: P/E Ratios Don’t Consider The Balance Sheet
It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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).
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.
How Does Select Bancorp’s Debt Impact Its P/E Ratio?
The extra options and safety that comes with Select Bancorp’s US$55m 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 Select Bancorp’s P/E Ratio
Select Bancorp’s P/E is 23.7 which is above average (16.5) in the US market. Falling earnings per share is probably keeping traditional value investors away, but the net cash position means the company has time to improve: and the high P/E suggests the market thinks it will.
Investors have an opportunity when market expectations about a stock are wrong. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. So this free report on the analyst consensus forecasts could help you make a master move on this stock.
You might be able to find a better buy than Select Bancorp. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
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 email@example.com.