This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll look at Sterling Bancorp, Inc. (Southfield, MI)'s (NASDAQ:SBT) P/E ratio and reflect on what it tells us about the company's share price. What is Sterling Bancorp (Southfield MI)'s P/E ratio? Well, based on the last twelve months it is 8.3. In other words, at today's prices, investors are paying $8.3 for every $1 in prior year profit.
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Sterling Bancorp (Southfield MI):
P/E of 8.3 = $9.95 ÷ $1.2 (Based on the year to March 2019.)
Is A High Price-to-Earnings Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. That isn't a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business's prospects, relative to stocks with a lower P/E.
How Does Sterling Bancorp (Southfield MI)'s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. We can see in the image below that the average P/E (14.6) for companies in the mortgage industry is higher than Sterling Bancorp (Southfield MI)'s P/E.
Its relatively low P/E ratio indicates that Sterling Bancorp (Southfield MI) shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Sterling Bancorp (Southfield MI), 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. Earnings growth means that in the future the 'E' will be higher. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. Then, a lower P/E should attract more buyers, pushing the share price up.
Sterling Bancorp (Southfield MI) increased earnings per share by a whopping 33% last year. And earnings per share have improved by 20% annually, over the last five years. I'd therefore be a little surprised if its P/E ratio was not relatively high.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don't forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. 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).
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 Sterling Bancorp (Southfield MI)'s P/E?
Net debt totals 66% of Sterling Bancorp (Southfield MI)'s market cap. If you want to compare its P/E ratio to other companies, you should absolutely keep in mind it has significant borrowings.
The Verdict On Sterling Bancorp (Southfield MI)'s P/E Ratio
Sterling Bancorp (Southfield MI)'s P/E is 8.3 which is below average (18) in the US market. The company may have significant debt, but EPS growth was good last year. If the company can continue to grow earnings, then the current P/E may be unjustifiably low.
Investors have an opportunity when market expectations about a stock are wrong. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. 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.
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.
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.
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. Thank you for reading.