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Here's What Norwood Financial Corp.'s (NASDAQ:NWFL) P/E Is Telling Us

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Simply Wall St
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The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at Norwood Financial Corp.'s (NASDAQ:NWFL) P/E ratio and reflect on what it tells us about the company's share price. What is Norwood Financial's P/E ratio? Well, based on the last twelve months it is 14.91. That corresponds to an earnings yield of approximately 6.7%.

Check out our latest analysis for Norwood Financial

How Do I Calculate A Price To Earnings Ratio?

The formula for price to earnings is:

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

Or for Norwood Financial:

P/E of 14.91 = $33.25 ÷ $2.23 (Based on the year to September 2019.)

Is A High Price-to-Earnings Ratio Good?

The higher the P/E ratio, the higher the price tag of a business, relative to its trailing 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.

Does Norwood Financial Have A Relatively High Or Low P/E For Its Industry?

The P/E ratio indicates whether the market has higher or lower expectations of a company. You can see in the image below that the average P/E (12.7) for companies in the banks industry is lower than Norwood Financial's P/E.

NasdaqGM:NWFL Price Estimation Relative to Market, November 6th 2019
NasdaqGM:NWFL Price Estimation Relative to Market, November 6th 2019

Its relatively high P/E ratio indicates that Norwood Financial shareholders think it will perform better than other companies in its industry classification. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and selling.

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. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. 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.

Notably, Norwood Financial grew EPS by a whopping 32% in the last year. And its annual EPS growth rate over 5 years is 8.0%. With that performance, I would expect it to have an above average P/E ratio.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

Don't forget that the P/E ratio considers market capitalization. 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.

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.

Norwood Financial's Balance Sheet

Net debt is 33% of Norwood Financial's market cap. While that's enough to warrant consideration, it doesn't really concern us.

The Verdict On Norwood Financial's P/E Ratio

Norwood Financial trades on a P/E ratio of 14.9, which is below the US market average of 18.3. The company does have a little debt, and EPS growth was good last year. If the company can continue to grow earnings, then the current P/E may be unjustifiably low.

Investors have an opportunity when market expectations about a stock are wrong. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. 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.

You might be able to find a better buy than Norwood Financial. 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).

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.