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Is First Financial Bankshares, Inc.’s (NASDAQ:FFIN) High P/E Ratio A Problem For Investors?

Simply Wall St

This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll look at First Financial Bankshares, Inc.’s (NASDAQ:FFIN) P/E ratio and reflect on what it tells us about the company’s share price. Based on the last twelve months, First Financial Bankshares’s P/E ratio is 27.01. That means that at current prices, buyers pay $27.01 for every $1 in trailing yearly profits.

Check out our latest analysis for First Financial Bankshares

How Do I Calculate A Price To Earnings Ratio?

The formula for price to earnings is:

Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)

Or for First Financial Bankshares:

P/E of 27.01 = $60.17 ÷ $2.23 (Based on the year to December 2018.)

Is A High P/E 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

Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the ‘E’ will be higher. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

First Financial Bankshares increased earnings per share by an impressive 22% over the last twelve months. And earnings per share have improved by 10% annually, over the last five years. This could arguably justify a relatively high P/E ratio.

How Does First Financial Bankshares’s P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. You can see in the image below that the average P/E (13.2) for companies in the banks industry is lower than First Financial Bankshares’s P/E.

NasdaqGS:FFIN Price Estimation Relative to Market, March 8th 2019
NasdaqGS:FFIN Price Estimation Relative to Market, March 8th 2019

That means that the market expects First Financial Bankshares will outperform other companies in its industry. Shareholders are clearly optimistic, but the future is always uncertain. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

Remember: P/E Ratios Don’t Consider The Balance Sheet

Don’t forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. Theoretically, a business can improve its earnings (and produce a lower P/E in the future), by taking on debt (or spending its remaining cash).

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.

Is Debt Impacting First Financial Bankshares’s P/E?

First Financial Bankshares has net debt worth just 5.7% of its market capitalization. The market might award it a higher P/E ratio if it had net cash, but its unlikely this low level of net borrowing is having a big impact on the P/E multiple.

The Verdict On First Financial Bankshares’s P/E Ratio

First Financial Bankshares’s P/E is 27 which is above average (17.4) in the US market. The company is not overly constrained by its modest debt levels, and it is growing earnings per share. Therefore it seems reasonable that the market would have relatively high expectations of the company

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 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 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.