Don't Sell Penns Woods Bancorp, Inc. (NASDAQ:PWOD) Before You Read This
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 Penns Woods Bancorp, Inc.'s (NASDAQ:PWOD) P/E ratio to inform your assessment of the investment opportunity. What is Penns Woods Bancorp's P/E ratio? Well, based on the last twelve months it is 12.29. That means that at current prices, buyers pay $12.29 for every $1 in trailing yearly profits.
See our latest analysis for Penns Woods Bancorp
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 Penns Woods Bancorp:
P/E of 12.29 = $42.46 ÷ $3.45 (Based on the trailing twelve months to June 2019.)
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. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.'
Does Penns Woods 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. The image below shows that Penns Woods Bancorp has a P/E ratio that is roughly in line with the banks industry average (12.3).
That indicates that the market expects Penns Woods Bancorp will perform roughly in line with other companies in its industry. The company could surprise by performing better than average, in the future. Further research into factors such as insider buying and selling, could help you form your own view on whether that is likely.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. When earnings grow, the 'E' increases, over time. And in that case, the P/E ratio itself will drop rather quickly. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Penns Woods Bancorp's earnings made like a rocket, taking off 51% last year. Having said that, if we look back three years, EPS growth has averaged a comparatively less impressive 6.5%.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don't forget that the P/E ratio considers market capitalization. So it won't reflect the advantage of cash, or disadvantage of debt. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
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).
So What Does Penns Woods Bancorp's Balance Sheet Tell Us?
Penns Woods Bancorp has net debt worth 64% of its market capitalization. This is a reasonably significant level of debt -- all else being equal you'd expect a much lower P/E than if it had net cash.
The Verdict On Penns Woods Bancorp's P/E Ratio
Penns Woods Bancorp has a P/E of 12.3. That's below the average in the US market, which is 17.4. The company has a meaningful amount of debt on the balance sheet, but that should not eclipse the solid earnings growth. If it continues to grow, then the current low P/E may prove to be unjustified.
When the market is wrong about a stock, it gives savvy investors an opportunity. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine.' Although we don't have analyst forecasts, you might want to assess this data-rich visualization of earnings, revenue and cash flow.
But note: Penns Woods Bancorp 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 editorial-team@simplywallst.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.
