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What Is Evans Bancorp's (NYSEMKT:EVBN) P/E Ratio After Its Share Price Tanked?

Simply Wall St
·4 min read

Unfortunately for some shareholders, the Evans Bancorp (NYSEMKT:EVBN) share price has dived 35% in the last thirty days. That drop has capped off a tough year for shareholders, with the share price down 31% in that time.

All else being equal, a share price drop should make a stock more attractive to potential investors. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. So, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). A high P/E implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.

View our latest analysis for Evans Bancorp

Does Evans Bancorp Have A Relatively High Or Low P/E For Its Industry?

We can tell from its P/E ratio of 7.30 that sentiment around Evans Bancorp isn't particularly high. We can see in the image below that the average P/E (9.7) for companies in the banks industry is higher than Evans Bancorp's P/E.

AMEX:EVBN Price Estimation Relative to Market, March 13th 2020
AMEX:EVBN Price Estimation Relative to Market, March 13th 2020

Its relatively low P/E ratio indicates that Evans Bancorp shareholders think it will struggle to do as well as other companies in its industry classification. Many investors like to buy stocks when the market is pessimistic about their prospects. You should delve deeper. I like to check if company insiders have been buying or selling.

How Growth Rates Impact P/E Ratios

Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means even if the current P/E is high, it will reduce over time if the share price stays flat. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Evans Bancorp maintained roughly steady earnings over the last twelve months. But over the longer term (5 years) earnings per share have increased by 12%.

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. 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.

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.

So What Does Evans Bancorp's Balance Sheet Tell Us?

Since Evans Bancorp holds net cash of US$11m, it can spend on growth, justifying a higher P/E ratio than otherwise.

The Bottom Line On Evans Bancorp's P/E Ratio

Evans Bancorp's P/E is 7.3 which is below average (13.3) in the US market. Earnings improved over the last year. And the net cash position gives the company many options. So it's strange that the low P/E indicates low expectations. Given Evans Bancorp's P/E ratio has declined from 11.3 to 7.3 in the last month, we know for sure that the market is more worried about the business today, than it was back then. For those who prefer invest in growth, this stock apparently offers limited promise, but the deep value investors may find the pessimism around this stock enticing.

Investors should be looking to buy stocks that the market is wrong about. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.

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.

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.

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. Thank you for reading.