Pathfinder Bancorp (NASDAQ:PBHC) shares have retraced a considerable in the last month. The recent drop has obliterated the annual return, with the share price now down 2.7% over that longer period. But shareholders who bought at the right time will be smiling, given that the stock is up 5.3% over the last quarter.
Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. In the long term, share prices tend to follow earnings per share, but in the short term prices bounce around in response to short term factors (which are not always obvious). 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 Pathfinder Bancorp's P/E Ratio Compare To Its Peers?
We can tell from its P/E ratio of 17.61 that there is some investor optimism about Pathfinder Bancorp. You can see in the image below that the average P/E (11.6) for companies in the banks industry is lower than Pathfinder Bancorp's P/E.
Pathfinder Bancorp's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Clearly the market expects growth, but it isn't guaranteed. So further research is always essential. I often monitor director buying and 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. That means unless the share price increases, the P/E will reduce in a few years. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Pathfinder Bancorp's earnings per share fell by 17% in the last twelve months. But over the longer term (5 years) earnings per share have increased by 4.7%.
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. That means it doesn't take debt or cash into account. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.
Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.
How Does Pathfinder Bancorp's Debt Impact Its P/E Ratio?
Pathfinder Bancorp has net debt worth 84% 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 Bottom Line On Pathfinder Bancorp's P/E Ratio
Pathfinder Bancorp's P/E is 17.6 which is about average (16.5) in the US market. With meaningful debt, and no earnings per share growth last year, even an average P/E indicates that the market a significant improvement from the business. Given Pathfinder Bancorp's P/E ratio has declined from 17.6 to 17.6 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. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. 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: Pathfinder 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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