Is First Midwest Bancorp, Inc.'s (NASDAQ:FMBI) P/E Ratio Really That Good?
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Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. To keep it practical, we'll show how First Midwest Bancorp, Inc.'s (NASDAQ:FMBI) P/E ratio could help you assess the value on offer. Looking at earnings over the last twelve months, First Midwest Bancorp has a P/E ratio of 12.46. That corresponds to an earnings yield of approximately 8.0%.
View our latest analysis for First Midwest 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 First Midwest Bancorp:
P/E of 12.46 = $20.28 ÷ $1.63 (Based on the trailing twelve months to March 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each $1 of company earnings. 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
Probably the most important factor in determining what P/E a company trades on is the earnings growth. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. That means unless the share price increases, the P/E will reduce in a few years. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
In the last year, First Midwest Bancorp grew EPS like Taylor Swift grew her fan base back in 2010; the 53% gain was both fast and well deserved. And earnings per share have improved by 17% annually, over the last three years. So we'd absolutely expect it to have a relatively high P/E ratio.
How Does First Midwest Bancorp's P/E Ratio Compare To Its Peers?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. The image below shows that First Midwest Bancorp has a P/E ratio that is roughly in line with the banks industry average (12.6).
That indicates that the market expects First Midwest Bancorp will perform roughly in line with other companies in its industry. So if First Midwest Bancorp actually outperforms its peers going forward, that should be a positive for the share price. Further research into factors such asmanagement tenure, could help you form your own view on whether that is likely.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. 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.
While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.
How Does First Midwest Bancorp's Debt Impact Its P/E Ratio?
First Midwest Bancorp has net debt equal to 40% of its market cap. While that's enough to warrant consideration, it doesn't really concern us.
The Verdict On First Midwest Bancorp's P/E Ratio
First Midwest Bancorp's P/E is 12.5 which is below average (17.5) in the US market. The company does have a little debt, and EPS growth was good last year. The low P/E ratio suggests current market expectations are muted, implying these levels of growth will not continue. Given analysts are expecting further growth, one might have expected a higher P/E ratio. That may be worth further research.
When the market is wrong about a stock, it gives savvy investors an opportunity. 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 report on the analyst consensus forecasts could help you make a master move on this stock.
But note: First Midwest 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.
