The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll show how you can use Dime Community Bancshares, Inc.’s (NASDAQ:DCOM) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Dime Community Bancshares’s P/E ratio is 11.92. That is equivalent to an earnings yield of about 8.4%.
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Dime Community Bancshares:
P/E of 11.92 = $17.3 ÷ $1.45 (Based on the year to September 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each $1 of company earnings. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
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. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
Dime Community Bancshares increased earnings per share by a whopping 46% last year. And it has bolstered its earnings per share by 3.7% per year over the last five years. I’d therefore be a little surprised if its P/E ratio was not relatively high. In contrast, EPS has decreased by 10.0%, annually, over 3 years.
How Does Dime Community Bancshares’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. The image below shows that Dime Community Bancshares has a lower P/E than the average (17.3) P/E for companies in the mortgage industry.
Its relatively low P/E ratio indicates that Dime Community Bancshares shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Dime Community Bancshares, it’s quite possible it could surprise on the upside. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. 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.
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).
Is Debt Impacting Dime Community Bancshares’s P/E?
Dime Community Bancshares’s net debt is considerable, at 163% of its market cap. This is a relatively high level of debt, so the stock probably deserves a relatively low P/E ratio. Keep that in mind when comparing it to other companies.
The Bottom Line On Dime Community Bancshares’s P/E Ratio
Dime Community Bancshares trades on a P/E ratio of 11.9, which is below the US market average of 17.2. While the EPS growth last year was strong, the significant debt levels reduce the number of options available to management. The low P/E ratio suggests current market expectations are muted, implying these levels of growth will not continue.
When the market is wrong about a stock, it gives savvy investors an opportunity. 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.’ So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.
But note: Dime Community Bancshares 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).
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.