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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll look at Guaranty Bancshares, Inc.'s (NASDAQ:GNTY) P/E ratio and reflect on what it tells us about the company's share price. Based on the last twelve months, Guaranty Bancshares's P/E ratio is 16.72. That is equivalent to an earnings yield of about 6.0%.
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 Guaranty Bancshares:
P/E of 16.72 = $30.7 ÷ $1.84 (Based on the trailing twelve months to March 2019.)
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 isn't a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business's prospects, relative to stocks with a lower P/E.
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. Then, a lower P/E should attract more buyers, pushing the share price up.
It's nice to see that Guaranty Bancshares grew EPS by a stonking 30% in the last year. And it has improved its earnings per share by 17% per year over the last three years. So we'd generally expect it to have a relatively high P/E ratio. In contrast, EPS has decreased by 1.7%, annually, over 5 years.
How Does Guaranty Bancshares's P/E Ratio Compare To Its Peers?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. You can see in the image below that the average P/E (12.9) for companies in the banks industry is lower than Guaranty Bancshares's P/E.
Its relatively high P/E ratio indicates that Guaranty Bancshares shareholders think it will perform better than other companies in its industry classification. The market is optimistic about the future, but that doesn't guarantee future growth. So further research is always essential. I often monitor director buying and selling.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. That means it doesn't take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
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.
How Does Guaranty Bancshares's Debt Impact Its P/E Ratio?
The extra options and safety that comes with Guaranty Bancshares's US$34m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.
The Bottom Line On Guaranty Bancshares's P/E Ratio
Guaranty Bancshares has a P/E of 16.7. That's below the average in the US market, which is 18.2. Not only should the net cash position reduce risk, but the recent growth has been impressive. One might conclude that the market is a bit pessimistic, given the low P/E ratio. Given analysts are expecting further growth, one I would have expected a higher P/E ratio. So this stock may well be worth further research.
Investors have an opportunity when market expectations about a stock are wrong. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
You might be able to find a better buy than Guaranty Bancshares. 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 email@example.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.