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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll show how you can use First Guaranty Bancshares, Inc.'s (NASDAQ:FGBI) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, First Guaranty Bancshares's P/E ratio is 13.63. That means that at current prices, buyers pay $13.63 for every $1 in trailing yearly profits.
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 First Guaranty Bancshares:
P/E of 13.63 = $22 ÷ $1.61 (Based on the year to December 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each $1 the company has earned over the last year. 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
If earnings fall then in the future the 'E' will be lower. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
First Guaranty Bancshares increased earnings per share by an impressive 18% over the last twelve months. And it has bolstered its earnings per share by 2.9% per year over the last five years. So one might expect an above average P/E ratio. Unfortunately, earnings per share are down 6.8% a year, over 3 years.
How Does First Guaranty Bancshares's P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. As you can see below First Guaranty Bancshares has a P/E ratio that is fairly close for the average for the banks industry, which is 13.
Its P/E ratio suggests that First Guaranty Bancshares shareholders think that in the future it will perform about the same as other companies in its industry classification. So if First Guaranty Bancshares actually outperforms its peers going forward, that should be a positive for the share price. Checking factors such as the tenure of the board and management could help you form your own view on if that will happen.
Remember: P/E Ratios Don't Consider The Balance Sheet
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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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 First Guaranty Bancshares's Debt Impact Its P/E Ratio?
Since First Guaranty Bancshares holds net cash of US$93m, it can spend on growth, justifying a higher P/E ratio than otherwise.
The Verdict On First Guaranty Bancshares's P/E Ratio
First Guaranty Bancshares trades on a P/E ratio of 13.6, which is below the US market average of 17.8. It grew its EPS nicely over the last year, and the healthy balance sheet implies there is more potential for growth. The relatively low P/E ratio implies the market is pessimistic.
Investors have an opportunity when market expectations about a stock are wrong. 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 visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.
But note: First Guaranty 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 email@example.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.