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A Sliding Share Price Has Us Looking At Columbia Banking System, Inc.'s (NASDAQ:COLB) P/E Ratio

Simply Wall St

Unfortunately for some shareholders, the Columbia Banking System (NASDAQ:COLB) share price has dived 36% in the last thirty days. The recent drop has obliterated the annual return, with the share price now down 25% over that longer period.

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. 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.

See our latest analysis for Columbia Banking System

Does Columbia Banking System Have A Relatively High Or Low P/E For Its Industry?

Columbia Banking System has a P/E ratio of 9.50. As you can see below Columbia Banking System has a P/E ratio that is fairly close for the average for the banks industry, which is 9.4.

NasdaqGS:COLB Price Estimation Relative to Market, March 17th 2020
NasdaqGS:COLB Price Estimation Relative to Market, March 17th 2020

Its P/E ratio suggests that Columbia Banking System shareholders think that in the future it will perform about the same as other companies in its industry classification. If the company has better than average prospects, then the market might be underestimating it. I would further inform my view by checking insider buying and selling., among other things.

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. And in that case, the P/E ratio itself will drop rather quickly. Then, a lower P/E should attract more buyers, pushing the share price up.

Most would be impressed by Columbia Banking System earnings growth of 13% in the last year. And it has bolstered its earnings per share by 12% per year over the last five years. So one might expect an above average P/E ratio.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

Don't forget that the P/E ratio considers market capitalization. That means it doesn't take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

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.

Columbia Banking System's Balance Sheet

Net debt is 48% of Columbia Banking System's market cap. While that's enough to warrant consideration, it doesn't really concern us.

The Verdict On Columbia Banking System's P/E Ratio

Columbia Banking System's P/E is 9.5 which is below average (12.7) in the US market. The company does have a little debt, and EPS growth was good last year. If it continues to grow, then the current low P/E may prove to be unjustified. What can be absolutely certain is that the market has become more pessimistic about Columbia Banking System over the last month, with the P/E ratio falling from 14.7 back then to 9.5 today. 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. 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 be able to find a better stock than Columbia Banking System. So you may wish to see this free collection of other companies that have grown earnings strongly.

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.