This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll look at Elmira Savings Bank’s (NASDAQ:ESBK) P/E ratio and reflect on what it tells us about the company’s share price. Elmira Savings Bank has a P/E ratio of 15.43, based on the last twelve months. That is equivalent to an earnings yield of about 6.5%.
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Elmira Savings Bank:
P/E of 15.43 = $20.35 ÷ $1.32 (Based on the trailing twelve months to September 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. All else being equal, it’s better to pay a low price — but as Warren Buffett said, ‘It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.’
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. Earnings growth means that in the future the ‘E’ will be higher. That means unless the share price increases, the P/E will reduce in a few years. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.
Most would be impressed by Elmira Savings Bank earnings growth of 17% in the last year. And it has improved its earnings per share by 4.6% per year over the last three years. With that performance, you might expect an above average P/E ratio.
How Does Elmira Savings Bank’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. If you look at the image below, you can see Elmira Savings Bank has a lower P/E than the average (18.2) in the mortgage industry classification.
Its relatively low P/E ratio indicates that Elmira Savings Bank shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Elmira Savings Bank, it’s quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or selling.
Remember: P/E Ratios Don’t Consider The Balance Sheet
Don’t forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. In theory, a company can lower its future P/E ratio by using cash or debt to invest in 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 Elmira Savings Bank’s Debt Impact Its P/E Ratio?
Elmira Savings Bank’s net debt is 21% of its market cap. This could bring some additional risk, and reduce the number of investment options for management; worth remembering if you compare its P/E to businesses without debt.
The Bottom Line On Elmira Savings Bank’s P/E Ratio
Elmira Savings Bank’s P/E is 15.4 which is below average (18.4) in the US market. The company hasn’t stretched its balance sheet, and earnings growth was good last year. The low P/E ratio suggests current market expectations are muted, implying these levels of growth will not continue.
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.’ Although we don’t have analyst forecasts, you might want to assess this data-rich visualization of earnings, revenue and cash flow.
Of course you might be able to find a better stock than Elmira Savings Bank. So you may wish to see this free collection of other companies that have grown earnings strongly.
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.