Riverview Financial (NASDAQ:RIVE) shares have retraced a considerable in the last month. The recent drop has obliterated the annual return, with the share price now down 12% over that longer period. But those shareholders who nailed the timing of their purchase will be quite happy; the stock has gained 18% in the last 90 days.
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. 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.
How Does Riverview Financial's P/E Ratio Compare To Its Peers?
Riverview Financial's P/E of 19.61 indicates some degree of optimism towards the stock. You can see in the image below that the average P/E (12.7) for companies in the banks industry is lower than Riverview Financial's P/E.
Riverview Financial's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. That means unless the share price falls, the P/E will increase in a few years. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.
In the last year, Riverview Financial grew EPS like Taylor Swift grew her fan base back in 2010; the 57% gain was both fast and well deserved. Regrettably, the longer term performance is poor, with EPS down 6.0% per year over 5 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. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.
Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.
So What Does Riverview Financial's Balance Sheet Tell Us?
With net cash of US$23m, Riverview Financial has a very strong balance sheet, which may be important for its business. Having said that, at 21% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.
The Verdict On Riverview Financial's P/E Ratio
Riverview Financial trades on a P/E ratio of 19.6, which is fairly close to the US market average of 18.4. The excess cash it carries is the gravy on top its fast EPS growth. So based on this analysis we'd expect Riverview Financial to have a higher P/E ratio. Given Riverview Financial's P/E ratio has declined from 19.6 to 19.6 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 don't like to trade against momentum, that could be a warning sign, but a contrarian investor might want to take a closer look.
Investors should be looking to buy stocks that the market is wrong about. 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.
You might be able to find a better buy than Riverview Financial. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
If you spot an error that warrants correction, please contact the editor at email@example.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.
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