This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll look at Central Pacific Financial Corp.’s (NYSE:CPF) P/E ratio and reflect on what it tells us about the company’s share price. Central Pacific Financial has a price to earnings ratio of 15.92, based on the last twelve months. In other words, at today’s prices, investors are paying $15.92 for every $1 in prior year profit.
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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 Central Pacific Financial:
P/E of 15.92 = $25.75 ÷ $1.62 (Based on the year 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
Earnings growth rates have a big influence on P/E ratios. 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. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Central Pacific Financial had pretty flat EPS growth in the last year. But it has grown its earnings per share by 1.4% per year over the last three years. And over the longer term (5 years) earnings per share have decreased 11% annually. So you wouldn’t expect a very high P/E.
How Does Central Pacific Financial’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that Central Pacific Financial has a higher P/E than the average (14.6) P/E for companies in the banks industry.
That means that the market expects Central Pacific Financial will outperform other companies in its industry. Clearly the market expects growth, but it isn’t guaranteed. 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
It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. Thus, the metric does not reflect cash or debt held by the company. 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 Central Pacific Financial’s Debt Impact Its P/E Ratio?
Central Pacific Financial’s net debt is 14% of its market cap. That’s enough debt to impact the P/E ratio a little; so keep it in mind if you’re comparing it to companies without debt.
The Verdict On Central Pacific Financial’s P/E Ratio
Central Pacific Financial’s P/E is 15.9 which is about average (16.8) in the US market. Given it has some debt, and grew earnings a bit last year, the P/E indicates the market is expecting steady ongoing progress.
Investors should be looking to buy stocks that the market is wrong about. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. 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 Central Pacific Financial. 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 email@example.com.