Read This Before You Buy HV Bancorp, Inc. (NASDAQ:HVBC) Because Of Its P/E Ratio
HV Bancorp (NASDAQ:HVBC) shares have retraced a considerable in the last month. But there's still good reason for shareholders to be content; the stock has gained 16% in the last 90 days. Looking back over the last year, the stock has been a solid performer, with a gain of 14%.
Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. 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. So some would prefer to hold off buying when there is a lot of optimism towards a stock. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.
Check out our latest analysis for HV Bancorp
Does HV Bancorp Have A Relatively High Or Low P/E For Its Industry?
We can tell from its P/E ratio of 37.23 that there is some investor optimism about HV Bancorp. You can see in the image below that the average P/E (14.3) for companies in the mortgage industry is lower than HV Bancorp's P/E.
That means that the market expects HV Bancorp will outperform other companies in its industry. The market is optimistic about the future, but that doesn't guarantee future growth. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
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. 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.
HV Bancorp increased earnings per share by an impressive 14% over the last twelve months.
Remember: P/E Ratios Don't Consider The Balance Sheet
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. In other words, it does not consider any debt or cash that the company may have on the balance sheet. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
How Does HV Bancorp's Debt Impact Its P/E Ratio?
Since HV Bancorp holds net cash of US$2.8m, it can spend on growth, justifying a higher P/E ratio than otherwise.
The Bottom Line On HV Bancorp's P/E Ratio
HV Bancorp has a P/E of 37.2. That's higher than the average in its market, which is 18.9. Its strong balance sheet gives the company plenty of resources for extra growth, and it has already proven it can grow. So it is not surprising the market is probably extrapolating recent growth well into the future, reflected in the relatively high P/E ratio. Given HV Bancorp's P/E ratio has declined from 37.2 to 37.2 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.
Investors have an opportunity when market expectations about a stock are wrong. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. 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.
But note: HV 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 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.