What Is Farmers & Merchants Bancorp's (NASDAQ:FMAO) P/E Ratio After Its Share Price Rocketed?
Those holding Farmers & Merchants Bancorp (NASDAQ:FMAO) shares must be pleased that the share price has rebounded 41% in the last thirty days. But unfortunately, the stock is still down by 17% over a quarter. But shareholders may not all be feeling jubilant, since the share price is still down 18% in the last year.
All else being equal, a sharp share price increase should make a stock less attractive to potential investors. In the long term, share prices tend to follow earnings per share, but in the short term prices bounce around in response to short term factors (which are not always obvious). The implication here is that deep value investors might steer clear when expectations of a company are too high. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.
View our latest analysis for Farmers & Merchants Bancorp
How Does Farmers & Merchants Bancorp's P/E Ratio Compare To Its Peers?
Farmers & Merchants Bancorp's P/E of 14.77 indicates some degree of optimism towards the stock. The image below shows that Farmers & Merchants Bancorp has a higher P/E than the average (9.2) P/E for companies in the banks industry.
That means that the market expects Farmers & Merchants Bancorp will outperform other companies in its industry. Shareholders are clearly optimistic, but the future is always uncertain. So investors should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.
Farmers & Merchants Bancorp increased earnings per share by 2.7% last year. And it has bolstered its earnings per share by 9.7% per year over the last five years.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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.
Farmers & Merchants Bancorp's Balance Sheet
Net debt totals 15% of Farmers & Merchants Bancorp's market cap. This could bring some additional risk, and reduce the number of investment options for management; worth remembering if you compare its P/E to businesses without debt.
The Verdict On Farmers & Merchants Bancorp's P/E Ratio
Farmers & Merchants Bancorp has a P/E of 14.8. That's around the same as the average in the US market, which is 14.0. When you consider the modest EPS growth last year (along with some debt), it seems the market thinks the growth is sustainable. What is very clear is that the market has become more optimistic about Farmers & Merchants Bancorp over the last month, with the P/E ratio rising from 10.5 back then to 14.8 today. For those who prefer to invest with the flow of momentum, that might mean it's time to put the stock on a watchlist, or research it. But the contrarian may see it as a missed opportunity.
Investors have an opportunity when market expectations about a stock are wrong. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
You might be able to find a better buy than Farmers & Merchants 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).
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.
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