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Here's How P/E Ratios Can Help Us Understand Siebert Financial Corp. (NASDAQ:SIEB)

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Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll apply a basic P/E ratio analysis to Siebert Financial Corp.'s (NASDAQ:SIEB), to help you decide if the stock is worth further research. Looking at earnings over the last twelve months, Siebert Financial has a P/E ratio of 20.24. That corresponds to an earnings yield of approximately 4.9%.

View our latest analysis for Siebert Financial

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 Siebert Financial:

P/E of 20.24 = $8.41 ÷ $0.42 (Based on the trailing twelve months to March 2019.)

Is A High Price-to-Earnings 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

P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the 'E' increases, over time. That means even if the current P/E is high, it will reduce over time if the share price stays flat. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

Siebert Financial's 160% EPS improvement over the last year was like bamboo growth after rain; rapid and impressive.

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

One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. If you look at the image below, you can see Siebert Financial has a lower P/E than the average (34.9) in the capital markets industry classification.

NasdaqCM:SIEB Price Estimation Relative to Market, June 26th 2019

This suggests that market participants think Siebert Financial will underperform other companies in its industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. You should delve deeper. I like to check if company insiders have been buying or selling.

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

The 'Price' in P/E reflects the market capitalization of the company. That means it doesn't take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

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.

Is Debt Impacting Siebert Financial's P/E?

Since Siebert Financial holds net cash of US$3.8m, it can spend on growth, justifying a higher P/E ratio than otherwise.

The Verdict On Siebert Financial's P/E Ratio

Siebert Financial's P/E is 20.2 which is above average (17.8) in the US market. Its net cash position is the cherry on top of its superb EPS growth. So based on this analysis we'd expect Siebert Financial to have a high P/E ratio.

Investors should be looking to buy stocks that the market is wrong about. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine.' We don't have analyst forecasts, but you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.

But note: Siebert Financial 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.