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Do You Know What Bancorp 34, Inc.'s (NASDAQ:BCTF) P/E Ratio Means?

Simply Wall St

Bancorp 34 (NASDAQ:BCTF) shares have retraced a considerable in the last month. But there's still good reason for shareholders to be content; the stock has gained 6.7% in the last 90 days. Indeed, the recent drop has reduced the annual gain to a relatively sedate 6.4% over the last 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 ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.

Check out our latest analysis for Bancorp 34

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

Bancorp 34's P/E of 57.94 indicates some degree of optimism towards the stock. The image below shows that Bancorp 34 has a significantly higher P/E than the average (14.3) P/E for companies in the mortgage industry.

NasdaqCM:BCTF Price Estimation Relative to Market, January 10th 2020

That means that the market expects Bancorp 34 will outperform other companies in its industry. Clearly the market expects growth, but it isn't guaranteed. So investors should delve deeper. I like to check if company insiders have been buying or selling.

How Growth Rates Impact P/E Ratios

Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. When earnings grow, the 'E' increases, over time. 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 shrunk earnings per share by 12% over the last year. But EPS is up 2.4% over the last 3 years. And over the longer term (5 years) earnings per share have decreased 27% annually. This growth rate might warrant a below average P/E ratio.

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

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. So it won't reflect the advantage of cash, or disadvantage of debt. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).

Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).

How Does Bancorp 34's Debt Impact Its P/E Ratio?

Net debt totals 54% of Bancorp 34's market cap. If you want to compare its P/E ratio to other companies, you should absolutely keep in mind it has significant borrowings.

The Bottom Line On Bancorp 34's P/E Ratio

With a P/E ratio of 57.9, 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. Given Bancorp 34's P/E ratio has declined from 57.9 to 57.9 in the last month, we know for sure that the market is less confident about the business today, than it was back then. 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.

When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. 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.