Why MainStreet Bancshares, Inc.'s (NASDAQ:MNSB) High P/E Ratio Isn't Necessarily A Bad Thing
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to MainStreet Bancshares, Inc.'s (NASDAQ:MNSB), to help you decide if the stock is worth further research. What is MainStreet Bancshares's P/E ratio? Well, based on the last twelve months it is 12.83. In other words, at today's prices, investors are paying $12.83 for every $1 in prior year profit.
See our latest analysis for MainStreet Bancshares
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for MainStreet Bancshares:
P/E of 12.83 = $21.89 ÷ $1.71 (Based on the trailing twelve months to September 2019.)
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 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 Does MainStreet 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. The image below shows that MainStreet Bancshares has a P/E ratio that is roughly in line with the banks industry average (12.7).
Its P/E ratio suggests that MainStreet Bancshares shareholders think that in the future it will perform about the same as other companies in its industry classification. So if MainStreet Bancshares actually outperforms its peers going forward, that should be a positive for the share price. I would further inform my view by checking insider buying and selling., among other things.
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. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
MainStreet Bancshares's earnings made like a rocket, taking off 62% last year. The sweetener is that the annual five year growth rate of 25% is also impressive. With that kind of growth rate we would generally expect a high P/E ratio.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. 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.
So What Does MainStreet Bancshares's Balance Sheet Tell Us?
With net cash of US$50m, MainStreet Bancshares has a very strong balance sheet, which may be important for its business. Having said that, at 28% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.
The Verdict On MainStreet Bancshares's P/E Ratio
MainStreet Bancshares's P/E is 12.8 which is below average (18.3) in the US market. Not only should the net cash position reduce risk, but the recent growth has been impressive. The below average P/E ratio suggests that market participants don't believe the strong growth will continue.
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 visual report on analyst forecasts could hold the key to an excellent investment decision.
But note: MainStreet Bancshares 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.
