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Why Northfield Bancorp, Inc. (Staten Island, NY)'s (NASDAQ:NFBK) High P/E Ratio Isn't Necessarily A Bad Thing

Simply Wall St

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This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll show how you can use Northfield Bancorp, Inc. (Staten Island, NY)'s (NASDAQ:NFBK) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Northfield Bancorp (Staten Island NY)'s P/E ratio is 18.99. That is equivalent to an earnings yield of about 5.3%.

See our latest analysis for Northfield Bancorp (Staten Island NY)

How Do You Calculate A P/E Ratio?

The formula for P/E is:

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

Or for Northfield Bancorp (Staten Island NY):

P/E of 18.99 = $15.65 ÷ $0.82 (Based on the year to March 2019.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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.

Does Northfield Bancorp (Staten Island NY) Have A Relatively High Or Low P/E For Its Industry?

We can get an indication of market expectations by looking at the P/E ratio. You can see in the image below that the average P/E (14.4) for companies in the mortgage industry is lower than Northfield Bancorp (Staten Island NY)'s P/E.

NasdaqGS:NFBK Price Estimation Relative to Market, July 9th 2019

Northfield Bancorp (Staten Island NY)'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.

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 even if the current P/E is high, it will reduce over time if the share price stays flat. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

It's nice to see that Northfield Bancorp (Staten Island NY) grew EPS by a stonking 48% in the last year. And it has bolstered its earnings per share by 18% per year over the last five years. So we'd generally expect it to have a relatively high P/E ratio.

Remember: P/E Ratios Don't Consider The Balance Sheet

The 'Price' in P/E reflects the market capitalization of the company. So it won't reflect the advantage of cash, or disadvantage of debt. 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.

Is Debt Impacting Northfield Bancorp (Staten Island NY)'s P/E?

Northfield Bancorp (Staten Island NY) has net debt equal to 40% of its market cap. While it's worth keeping this in mind, it isn't a worry.

The Verdict On Northfield Bancorp (Staten Island NY)'s P/E Ratio

Northfield Bancorp (Staten Island NY) has a P/E of 19. That's around the same as the average in the US market, which is 18.1. When you consider the impressive EPS growth last year (along with some debt), it seems the market has questions about whether rapid EPS growth will be sustained.

Investors have an opportunity when market expectations about a stock are wrong. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

But note: Northfield Bancorp (Staten Island NY) 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.