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Read This Before You Buy Home Federal Bancorp, Inc. of Louisiana (NASDAQ:HFBL) Because Of Its P/E Ratio

Simply Wall St

Unfortunately for some shareholders, the Home Federal Bancorp of Louisiana (NASDAQ:HFBL) share price has dived in the last thirty days. Even longer term holders have taken a real hit with the stock declining 18% in the last year.

All else being equal, a sharp share price increase should make a stock less attractive to potential investors. 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. Perhaps the simplest way to get a read on investors' expectations of a business 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.

See our latest analysis for Home Federal Bancorp of Louisiana

How Does Home Federal Bancorp of Louisiana's P/E Ratio Compare To Its Peers?

Home Federal Bancorp of Louisiana has a P/E ratio of 11.07. The image below shows that Home Federal Bancorp of Louisiana has a P/E ratio that is roughly in line with the mortgage industry average (11.0).

NasdaqCM:HFBL Price Estimation Relative to Market, March 15th 2020

Home Federal Bancorp of Louisiana's P/E tells us that market participants think its prospects are roughly in line with its industry. So if Home Federal Bancorp of Louisiana actually outperforms its peers going forward, that should be a positive for the share price. I would further inform my view by checking insider buying and selling., among other things.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. When earnings grow, the 'E' increases, over time. And in that case, the P/E ratio itself will drop rather quickly. Then, a lower P/E should attract more buyers, pushing the share price up.

Home Federal Bancorp of Louisiana saw earnings per share decrease by 5.9% last year. But EPS is up 9.9% over the last 5 years.

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. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

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).

How Does Home Federal Bancorp of Louisiana's Debt Impact Its P/E Ratio?

With net cash of US$12m, Home Federal Bancorp of Louisiana has a very strong balance sheet, which may be important for its business. Having said that, at 28% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.

The Bottom Line On Home Federal Bancorp of Louisiana's P/E Ratio

Home Federal Bancorp of Louisiana trades on a P/E ratio of 11.1, which is below the US market average of 14.0. The recent drop in earnings per share would almost certainly temper expectations, the relatively strong balance sheet will allow the company time to invest in growth. If it achieves that, then there's real potential that the low P/E could eventually indicate undervaluation. Given Home Federal Bancorp of Louisiana's P/E ratio has declined from 11.1 to 11.1 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 prefer to invest with the flow of momentum, that might be a bad sign, but for a contrarian, it may signal opportunity.

When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. 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.

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 editorial-team@simplywallst.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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.