This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). To keep it practical, we’ll show how Northfield Bancorp, Inc. (Staten Island, NY)’s (NASDAQ:NFBK) P/E ratio could help you assess the value on offer. Northfield Bancorp (Staten Island NY) has a P/E ratio of 21.74, based on the last twelve months. That is equivalent to an earnings yield of about 4.6%.
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 Northfield Bancorp (Staten Island NY):
P/E of 21.74 = $13.42 ÷ $0.62 (Based on the trailing twelve months to September 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. That isn’t necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
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. When earnings grow, the ‘E’ increases, over time. That means unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.
Northfield Bancorp (Staten Island NY) shrunk earnings per share by 20% over the last year. But over the longer term (5 years) earnings per share have increased by 14%.
How Does Northfield Bancorp (Staten Island NY)’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. As you can see below, Northfield Bancorp (Staten Island NY) has a higher P/E than the average company (17.1) in the mortgage industry.
That means that the market expects Northfield Bancorp (Staten Island NY) will outperform other companies in its industry. 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.
Remember: P/E Ratios Don’t Consider The Balance Sheet
The ‘Price’ in P/E reflects the market capitalization of the company. That means it doesn’t take debt or cash into account. Theoretically, a business can improve its earnings (and produce a lower P/E in the future), by taking on debt (or spending its remaining 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 Northfield Bancorp (Staten Island NY)’s Debt Impact Its P/E Ratio?
Northfield Bancorp (Staten Island NY)’s net debt is 56% of its market cap. This is enough debt that you’d have to make some adjustments before using the P/E ratio to compare it to a company with net cash.
The Verdict On Northfield Bancorp (Staten Island NY)’s P/E Ratio
Northfield Bancorp (Staten Island NY) trades on a P/E ratio of 21.7, which is above the US market average of 16.8. With relatively high debt, and no earnings per share growth over twelve months, it’s safe to say the market believes the company will improve its earnings growth in the future.
Investors should be looking to buy stocks that the market is wrong about. 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 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 Northfield Bancorp (Staten Island NY). So you may wish to see this free collection of other companies that have grown earnings strongly.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.