Should We Worry About Blue Hills Bancorp, Inc.’s (NASDAQ:BHBK) P/E Ratio?
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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 look at Blue Hills Bancorp, Inc.’s (NASDAQ:BHBK) P/E ratio and reflect on what it tells us about the company’s share price. Blue Hills Bancorp has a price to earnings ratio of 22.1, based on the last twelve months. In other words, at today’s prices, investors are paying $22.1 for every $1 in prior year profit.
See our latest analysis for Blue Hills Bancorp
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Blue Hills Bancorp:
P/E of 22.1 = $22.37 ÷ $1.01 (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 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
P/E ratios primarily reflect market expectations around earnings growth rates. Earnings growth means that in the future the ‘E’ will be higher. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.
It’s nice to see that Blue Hills Bancorp grew EPS by a stonking 47% in the last year. And it has bolstered its earnings per share by 53% per year over the last five years. So we’d generally expect it to have a relatively high P/E ratio.
How Does Blue Hills Bancorp’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, Blue Hills Bancorp has a higher P/E than the average company (12.7) in the banks industry.
Blue Hills Bancorp’s P/E tells us that market participants think the company will perform better than its industry peers, going forward. Clearly the market expects growth, but it isn’t guaranteed. So investors should delve deeper. I like to check if company insiders have been buying or selling.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
The ‘Price’ in P/E reflects the market capitalization of the company. Thus, the metric does not reflect cash or debt held by the company. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.
Blue Hills Bancorp’s Balance Sheet
Net debt totals 34% of Blue Hills Bancorp’s market cap. This is a reasonably significant level of debt — all else being equal you’d expect a much lower P/E than if it had net cash.
The Verdict On Blue Hills Bancorp’s P/E Ratio
Blue Hills Bancorp has a P/E of 22.1. That’s higher than the average in the US market, which is 17.2. While the company does use modest debt, its recent earnings growth is impressive. So it is not surprising the market is probably extrapolating recent growth well into the future, reflected in the relatively high P/E ratio.
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 report on the analyst consensus forecasts could help you make a master move on this stock.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E 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.
