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Should You Be Tempted To Sell Eagle Bancorp Montana, Inc. (NASDAQ:EBMT) Because Of Its P/E Ratio?

Simply Wall St

This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll show how you can use Eagle Bancorp Montana, Inc.’s (NASDAQ:EBMT) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Eagle Bancorp Montana’s P/E ratio is 18.95. That corresponds to an earnings yield of approximately 5.3%.

View our latest analysis for Eagle Bancorp Montana

How Do You Calculate A P/E Ratio?

The formula for price to earnings is:

Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)

Or for Eagle Bancorp Montana:

P/E of 18.95 = $17.4 ÷ $0.92 (Based on the trailing twelve months to December 2018.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that buyers have to pay a higher price for each $1 the company has earned over the last year. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.

How Growth Rates Impact P/E Ratios

Companies that shrink earnings per share quickly will rapidly decrease the ‘E’ in the equation. That means even if the current P/E is low, it will increase over time if the share price stays flat. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.

Eagle Bancorp Montana’s earnings per share fell by 8.8% in the last twelve months. But EPS is up 12% over the last 5 years.

How Does Eagle Bancorp Montana’s P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. You can see in the image below that the average P/E (13.6) for companies in the banks industry is lower than Eagle Bancorp Montana’s P/E.

NasdaqGM:EBMT Price Estimation Relative to Market, March 4th 2019

Eagle Bancorp Montana’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.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

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 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.

Eagle Bancorp Montana’s Balance Sheet

Eagle Bancorp Montana has net debt worth a very significant 123% of its market capitalization. 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 Bottom Line On Eagle Bancorp Montana’s P/E Ratio

Eagle Bancorp Montana trades on a P/E ratio of 19, which is fairly close to the US market average of 17.8. With relatively high debt, and no earnings per share growth over twelve months, the P/E suggests that many have an expectation that company will find some growth.

Investors have an opportunity when market expectations about a stock are wrong. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

But note: Eagle Bancorp Montana may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

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.