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A Rising Share Price Has Us Looking Closely At First Northwest Bancorp's (NASDAQ:FNWB) P/E Ratio

Simply Wall St
·4 mins read

First Northwest Bancorp (NASDAQ:FNWB) shareholders are no doubt pleased to see that the share price has bounced 33% in the last month alone, although it is still down 23% over the last quarter. But shareholders may not all be feeling jubilant, since the share price is still down 20% in the last year.

All else being equal, a sharp share price increase should make a stock less 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 some would prefer to hold off buying when there is a lot of optimism towards a stock. 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 implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.

View our latest analysis for First Northwest Bancorp

How Does First Northwest Bancorp's P/E Ratio Compare To Its Peers?

We can tell from its P/E ratio of 16.16 that there is some investor optimism about First Northwest Bancorp. The image below shows that First Northwest Bancorp has a higher P/E than the average (9.3) P/E for companies in the banks industry.

NasdaqGM:FNWB Price Estimation Relative to Market May 21st 2020
NasdaqGM:FNWB Price Estimation Relative to Market May 21st 2020

First Northwest Bancorp's P/E tells us that market participants think the company will perform better than its industry peers, going forward. The market is optimistic about the future, but that doesn't guarantee future growth. So investors should delve deeper. I like to check if company insiders have been buying or selling.

How Growth Rates Impact P/E Ratios

Probably the most important factor in determining what P/E a company trades on is the earnings growth. Earnings growth means that in the future the 'E' will be higher. That means even if the current P/E is high, it will reduce over time if the share price stays flat. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

First Northwest Bancorp saw earnings per share improve by 3.0% last year. And it has improved its earnings per share by 20% per year over the last three years.

Remember: P/E Ratios Don't Consider The Balance Sheet

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. 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).

First Northwest Bancorp's Balance Sheet

First Northwest Bancorp has net debt equal to 35% of its market cap. While it's worth keeping this in mind, it isn't a worry.

The Verdict On First Northwest Bancorp's P/E Ratio

First Northwest Bancorp's P/E is 16.2 which is above average (14.8) in its market. Given the debt is only modest, and earnings are already moving in the right direction, it's not surprising that the market expects continued improvement. What is very clear is that the market has become more optimistic about First Northwest Bancorp over the last month, with the P/E ratio rising from 12.2 back then to 16.2 today. For those who prefer to invest with the flow of momentum, that might mean it's time to put the stock on a watchlist, or research it. But the contrarian may see it as a missed opportunity.

Investors have an opportunity when market expectations about a stock are wrong. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. 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 be able to find a better stock than First Northwest Bancorp. So you may wish to see this free collection of other companies that have grown earnings strongly.

Love or hate this article? Concerned about the content? Get in touch with us directly. Alternatively, email 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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.