To the annoyance of some shareholders, Kentucky First Federal Bancorp (NASDAQ:KFFB) shares are down a considerable in the last month. Even longer term holders have taken a real hit with the stock declining 8.1% in the last year. At least the stock is still up slightly on where it was at the start of the quarter.
Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. 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. One way to gauge market expectations of a stock 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.
How Does Kentucky First Federal Bancorp's P/E Ratio Compare To Its Peers?
Kentucky First Federal Bancorp's P/E of 62.85 indicates some degree of optimism towards the stock. As you can see below, Kentucky First Federal Bancorp has a much higher P/E than the average company (13.4) in the mortgage industry.
That means that the market expects Kentucky First Federal Bancorp 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
If earnings fall then in the future the 'E' will be lower. That means unless the share price falls, the P/E will increase in a few years. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.
In the last year, Kentucky First Federal Bancorp grew EPS like Taylor Swift grew her fan base back in 2010; the 108% gain was both fast and well deserved. Regrettably, the longer term performance is poor, with EPS down 12% per year over 5 years.
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. 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.
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.
So What Does Kentucky First Federal Bancorp's Balance Sheet Tell Us?
Kentucky First Federal Bancorp's net debt is 75% of its 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 Verdict On Kentucky First Federal Bancorp's P/E Ratio
Kentucky First Federal Bancorp's P/E is 62.8 which suggests the market is more focussed on the future opportunity rather than the current level of earnings. While its debt levels are rather high, at least its EPS is growing quickly. So it seems likely the market is overlooking the debt because of the fast earnings growth. Given Kentucky First Federal Bancorp's P/E ratio has declined from 62.8 to 62.8 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 don't like to trade against momentum, that could be a warning sign, but a contrarian investor might want to take a closer look.
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.
But note: Kentucky First Federal 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).
If you spot an error that warrants correction, please contact the editor at email@example.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.
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