Should You Be Tempted To Sell Bancorp 34, Inc. (NASDAQ:BCTF) Because Of Its P/E Ratio?
Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll look at Bancorp 34, Inc.'s (NASDAQ:BCTF) P/E ratio and reflect on what it tells us about the company's share price. Based on the last twelve months, Bancorp 34's P/E ratio is 46.36. That means that at current prices, buyers pay $46.36 for every $1 in trailing yearly profits.
See our latest analysis for Bancorp 34
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Bancorp 34:
P/E of 46.36 = $15.37 ÷ $0.33 (Based on the year to December 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each $1 of company earnings. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.'
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. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. And in that case, the P/E ratio itself will drop rather quickly. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
In the last year, Bancorp 34 grew EPS like Taylor Swift grew her fan base back in 2010; the 200% gain was both fast and well deserved. And earnings per share have improved by 52% annually, over the last three years. So we'd absolutely expect it to have a relatively high P/E ratio.
Does Bancorp 34 Have A Relatively High Or Low P/E For Its Industry?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. As you can see below, Bancorp 34 has a much higher P/E than the average company (14.6) in the mortgage industry.
Bancorp 34's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Clearly the market expects growth, but it isn't guaranteed. So investors should delve deeper. I like to check if company insiders have been buying or selling.
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. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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).
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
How Does Bancorp 34's Debt Impact Its P/E Ratio?
Net debt totals a substantial 115% of Bancorp 34's market cap. This is a relatively high level of debt, so the stock probably deserves a relatively low P/E ratio. Keep that in mind when comparing it to other companies.
The Verdict On Bancorp 34's P/E Ratio
Bancorp 34 trades on a P/E ratio of 46.4, which is above the US market average of 18.2. Its meaningful level of debt should warrant a lower P/E ratio, but the fast EPS growth is a positive. So it seems likely the market is overlooking the debt because of the fast earnings growth.
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.' 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 Bancorp 34. 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).
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.
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. Thank you for reading.
