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The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll show how you can use Bank of Marin Bancorp's (NASDAQ:BMRC) P/E ratio to inform your assessment of the investment opportunity. What is Bank of Marin Bancorp's P/E ratio? Well, based on the last twelve months it is 17.38. In other words, at today's prices, investors are paying $17.38 for every $1 in prior year profit.
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Bank of Marin Bancorp:
P/E of 17.38 = $42.33 ÷ $2.44 (Based on the trailing twelve months 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 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.
Does Bank of Marin Bancorp Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio indicates whether the market has higher or lower expectations of a company. As you can see below, Bank of Marin Bancorp has a higher P/E than the average company (12.9) in the banks industry.
Bank of Marin Bancorp's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. 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. When earnings grow, the 'E' increases, over time. That means unless the share price increases, the P/E will reduce in a few years. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Bank of Marin Bancorp's earnings made like a rocket, taking off 75% last year. Having said that, the average EPS growth over the last three years wasn't so good, coming in at 14%.
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. Thus, the metric does not reflect cash or debt held by the company. 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.
Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.
How Does Bank of Marin Bancorp's Debt Impact Its P/E Ratio?
Bank of Marin Bancorp has net cash of US$37m. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.
The Bottom Line On Bank of Marin Bancorp's P/E Ratio
Bank of Marin Bancorp has a P/E of 17.4. That's around the same as the average in the US market, which is 18.1. The excess cash it carries is the gravy on top its fast EPS growth. So based on this analysis we'd expect Bank of Marin Bancorp to have a higher P/E ratio.
Investors should be looking to buy stocks that the market is wrong about. 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 report on the analyst consensus forecasts could help you make a master move on this stock.
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.
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.