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A Sliding Share Price Has Us Looking At Bank of the James Financial Group, Inc.'s (NASDAQ:BOTJ) P/E Ratio

Unfortunately for some shareholders, the Bank of the James Financial Group (NASDAQ:BOTJ) share price has dived 41% in the last thirty days. Indeed the recent decline has arguably caused some bitterness for shareholders who have held through the 39% drop over twelve months.

All else being equal, a share price drop should make a stock more 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, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. One way to gauge market expectations of a stock 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.

Check out our latest analysis for Bank of the James Financial Group

How Does Bank of the James Financial Group's P/E Ratio Compare To Its Peers?

We can tell from its P/E ratio of 6.71 that sentiment around Bank of the James Financial Group isn't particularly high. We can see in the image below that the average P/E (8.6) for companies in the banks industry is higher than Bank of the James Financial Group's P/E.

NasdaqCM:BOTJ Price Estimation Relative to Market March 26th 2020
NasdaqCM:BOTJ Price Estimation Relative to Market March 26th 2020

Its relatively low P/E ratio indicates that Bank of the James Financial Group shareholders think it will struggle to do as well as other companies in its industry classification. Many investors like to buy stocks when the market is pessimistic about their prospects. You 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. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. And in that case, the P/E ratio itself will drop rather quickly. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Bank of the James Financial Group's earnings per share grew by 5.8% in the last twelve months. And it has bolstered its earnings per share by 4.8% per year over the last five 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. So it won't reflect the advantage of cash, or disadvantage of debt. 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).

While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.

Bank of the James Financial Group's Balance Sheet

With net cash of US$18m, Bank of the James Financial Group has a very strong balance sheet, which may be important for its business. Having said that, at 49% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.

The Bottom Line On Bank of the James Financial Group's P/E Ratio

Bank of the James Financial Group trades on a P/E ratio of 6.7, which is below the US market average of 12.6. Earnings improved over the last year. And the net cash position gives the company many options. So it's strange that the low P/E indicates low expectations. Given Bank of the James Financial Group's P/E ratio has declined from 11.4 to 6.7 in the last month, we know for sure that the market is more worried about the business today, than it was back then. For those who prefer invest in growth, this stock apparently offers limited promise, but the deep value investors may find the pessimism around this stock enticing.

Investors should be looking to buy stocks that the market is wrong about. 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. We don't have analyst forecasts, but 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 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.

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