U.S. Markets closed

Here's What Bancorp 34, Inc.'s (NASDAQ:BCTF) P/E Ratio Is Telling Us

Simply Wall St

Bancorp 34 (NASDAQ:BCTF) shares have given back plenty of recent gains in the last month, dropping . The bad news is that the recent drop obliterated the last year's worth of gains; the stock is flat over twelve months.

All else being equal, a sharp share price increase should make a stock less 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. The implication here is that deep value investors might steer clear when expectations of a company are too high. Perhaps the simplest way to get a read on investors' expectations of a business 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.

See our latest analysis for Bancorp 34

How Does Bancorp 34's P/E Ratio Compare To Its Peers?

We can tell from its P/E ratio of 56.42 that there is some investor optimism about Bancorp 34. You can see in the image below that the average P/E (14.7) for companies in the mortgage industry is a lot lower than Bancorp 34's P/E.

NasdaqCM:BCTF Price Estimation Relative to Market, December 1st 2019

Its relatively high P/E ratio indicates that Bancorp 34 shareholders think it will perform better than other companies in its industry classification. The market is optimistic about the future, but that doesn't guarantee future growth. So further research is always essential. I often monitor director buying and selling.

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. And in that case, the P/E ratio itself will drop rather quickly. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

Bancorp 34 saw earnings per share decrease by 12% last year. But it has grown its earnings per share by 2.4% per year over the last three years. And over the longer term (5 years) earnings per share have decreased 27% annually. This might lead to muted expectations.

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. 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.

Is Debt Impacting Bancorp 34's P/E?

Bancorp 34 has net debt worth 56% 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 Bancorp 34's P/E Ratio

With a P/E ratio of 56.4, Bancorp 34 is expected to grow earnings very strongly in the years to come. With relatively high debt, and no earnings per share growth over twelve months, it's safe to say the market believes the company will improve its earnings growth in the future. What can be absolutely certain is that the market has become less optimistic about Bancorp 34 over the last month, with the P/E ratio falling from 56.4 back then to 56.4 today. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for a contrarian, it may signal 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. Although we don't have analyst forecasts you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.

Of course you might be able to find a better stock than Bancorp 34. So you may wish to see this free collection of other companies that have grown earnings strongly.

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.