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A Rising Share Price Has Us Looking Closely At Prosperity Bancshares, Inc.'s (NYSE:PB) P/E Ratio

Simply Wall St

Those holding Prosperity Bancshares (NYSE:PB) shares must be pleased that the share price has rebounded 31% in the last thirty days. But unfortunately, the stock is still down by 19% over a quarter. But shareholders may not all be feeling jubilant, since the share price is still down 21% in the last year.

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. 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.

View our latest analysis for Prosperity Bancshares

Does Prosperity Bancshares Have A Relatively High Or Low P/E For Its Industry?

Prosperity Bancshares's P/E of 12.24 indicates some degree of optimism towards the stock. As you can see below, Prosperity Bancshares has a higher P/E than the average company (9.8) in the banks industry.

NYSE:PB Price Estimation Relative to Market May 4th 2020

That means that the market expects Prosperity Bancshares 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

Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. Earnings growth means that in the future the 'E' will be higher. 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.

Prosperity Bancshares's earnings per share were pretty steady over the last year. But it has grown its earnings per share by 1.9% per year over the last five years.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. 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).

Prosperity Bancshares's Balance Sheet

Net debt is 25% of Prosperity Bancshares's market cap. While that's enough to warrant consideration, it doesn't really concern us.

The Bottom Line On Prosperity Bancshares's P/E Ratio

Prosperity Bancshares's P/E is 12.2 which is below average (14.4) in the US market. The company does have a little debt, and EPS is moving in the right direction. If you believe growth will continue - or even increase - then the low P/E may signify opportunity. What we know for sure is that investors have become more excited about Prosperity Bancshares recently, since they have pushed its P/E ratio from 9.4 to 12.2 over the last month. If you like to buy stocks that have recently impressed the market, then this one might be a candidate; but if you prefer to invest when there is 'blood in the streets', then you may feel the opportunity has passed.

Investors have an opportunity when market expectations about a stock are wrong. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

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.