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A Sliding Share Price Has Us Looking At Boston Private Financial Holdings, Inc.'s (NASDAQ:BPFH) P/E Ratio

Simply Wall St
·4 mins read

To the annoyance of some shareholders, Boston Private Financial Holdings (NASDAQ:BPFH) shares are down a considerable 32% in the last month. Indeed the recent decline has arguably caused some bitterness for shareholders who have held through the 32% drop over twelve months.

Assuming nothing else has changed, a lower share price makes a stock more 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. The implication here is that long term investors have an opportunity when expectations of a company are too low. 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). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.

See our latest analysis for Boston Private Financial Holdings

How Does Boston Private Financial Holdings's P/E Ratio Compare To Its Peers?

We can tell from its P/E ratio of 8.00 that sentiment around Boston Private Financial Holdings isn't particularly high. We can see in the image below that the average P/E (10.5) for companies in the banks industry is higher than Boston Private Financial Holdings's P/E.

NasdaqGS:BPFH Price Estimation Relative to Market, March 10th 2020
NasdaqGS:BPFH Price Estimation Relative to Market, March 10th 2020

This suggests that market participants think Boston Private Financial Holdings will underperform other companies in its industry. 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

P/E ratios primarily reflect market expectations around earnings growth rates. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means even if the current P/E is high, it will reduce over time if the share price stays flat. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

Boston Private Financial Holdings saw earnings per share improve by -6.0% last year. And it has bolstered its earnings per share by 5.5% per year over the last five years.

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

The 'Price' in P/E reflects the market capitalization of the company. So it won't reflect the advantage of cash, or disadvantage of debt. 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.

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).

So What Does Boston Private Financial Holdings's Balance Sheet Tell Us?

Boston Private Financial Holdings has net debt equal to 34% of its market cap. While that's enough to warrant consideration, it doesn't really concern us.

The Bottom Line On Boston Private Financial Holdings's P/E Ratio

Boston Private Financial Holdings has a P/E of 8.0. That's below the average in the US market, which is 15.1. The company does have a little debt, and EPS is moving in the right direction. If growth is sustainable over the long term, then the current P/E ratio may be a sign of good value. Given Boston Private Financial Holdings's P/E ratio has declined from 11.8 to 8.0 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 to invest with the flow of momentum, that might be a bad sign, but for deep value investors this stock might justify some research.

When the market is wrong about a stock, it gives savvy investors an opportunity. 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 visual report on analyst forecasts could hold the key to an excellent investment decision.

Of course you might be able to find a better stock than Boston Private Financial Holdings. 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.