Unfortunately for some shareholders, the Peoples Bancorp of North Carolina (NASDAQ:PEBK) share price has dived 33% in the last thirty days. That drop has capped off a tough year for shareholders, with the share price down 37% in that time.
All else being equal, a share price drop should make a stock more attractive to potential investors. 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). So, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. One way to gauge market expectations of a stock 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.
How Does Peoples Bancorp of North Carolina's P/E Ratio Compare To Its Peers?
Peoples Bancorp of North Carolina's P/E of 7.12 indicates relatively low sentiment towards the stock. If you look at the image below, you can see Peoples Bancorp of North Carolina has a lower P/E than the average (8.8) in the banks industry classification.
This suggests that market participants think Peoples Bancorp of North Carolina will underperform other companies in its industry. Since the market seems unimpressed with Peoples Bancorp of North Carolina, 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.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the 'E' increases, over time. And in that case, the P/E ratio itself will drop rather quickly. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Peoples Bancorp of North Carolina saw earnings per share improve by 6.1% last year. And its annual EPS growth rate over 5 years is 9.3%.
Remember: P/E Ratios Don't Consider The Balance Sheet
Don't forget that the P/E ratio considers market capitalization. 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).
While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.
How Does Peoples Bancorp of North Carolina's Debt Impact Its P/E Ratio?
Peoples Bancorp of North Carolina has net debt worth just 0.7% of its market capitalization. The market might award it a higher P/E ratio if it had net cash, but its unlikely this low level of net borrowing is having a big impact on the P/E multiple.
The Verdict On Peoples Bancorp of North Carolina's P/E Ratio
Peoples Bancorp of North Carolina's P/E is 7.1 which is below average (12.9) in the US market. The company hasn't stretched its balance sheet, and earnings are improving. If you believe growth will continue - or even increase - then the low P/E may signify opportunity. Given Peoples Bancorp of North Carolina's P/E ratio has declined from 10.7 to 7.1 in the last month, we know for sure that the market is more worried 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 deep value investors this stock might justify some research.
When the market is wrong about a stock, it gives savvy investors an opportunity. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. 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 find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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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