Despite Its High P/E Ratio, Is Bank of Marin Bancorp (NASDAQ:BMRC) Still Undervalued?

Today, we’ll introduce the concept of the P/E ratio for those who are learning about investing. We’ll look at Bank of Marin Bancorp’s (NASDAQ:BMRC) P/E ratio and reflect on what it tells us about the company’s share price. Bank of Marin Bancorp has a price to earnings ratio of 17.62, based on the last twelve months. That means that at current prices, buyers pay $17.62 for every $1 in trailing yearly profits.

See our latest analysis for Bank of Marin Bancorp

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 Bank of Marin Bancorp:

P/E of 17.62 = USD44.30 ÷ USD2.51 (Based on the trailing twelve months to December 2019.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that buyers have to pay a higher price for each USD1 the company has earned over the last year. All else being equal, it’s better to pay a low price — but as Warren Buffett said, ‘It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price’.

Does Bank of Marin Bancorp Have A Relatively High Or Low P/E For Its Industry?

The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that Bank of Marin Bancorp has a higher P/E than the average (12.6) P/E for companies in the banks industry.

NasdaqCM:BMRC Price Estimation Relative to Market, February 18th 2020
NasdaqCM:BMRC Price Estimation Relative to Market, February 18th 2020

That means that the market expects Bank of Marin Bancorp will outperform other companies in its industry. Shareholders are clearly optimistic, but the future is always uncertain. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. 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.

Bank of Marin Bancorp’s earnings per share grew by -6.8% in the last twelve months. And it has bolstered its earnings per share by 8.4% per year over the last five years.

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

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 investing in growth. That means taking on debt (or spending its cash).

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.

How Does Bank of Marin Bancorp’s Debt Impact Its P/E Ratio?

With net cash of US$180m, Bank of Marin Bancorp has a very strong balance sheet, which may be important for its business. Having said that, at 30% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.

The Bottom Line On Bank of Marin Bancorp’s P/E Ratio

Bank of Marin Bancorp trades on a P/E ratio of 17.6, which is fairly close to the US market average of 18.4. EPS was up modestly better over the last twelve months. Also positive, the relatively strong balance sheet will allow for investment in growth. If this occurs the current P/E might prove to signify undervaluation.

When the market is wrong about a stock, it gives savvy investors an opportunity. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.

Of course you might be able to find a better stock than Bank of Marin Bancorp. So you may wish to see this free collection of other companies that have grown earnings strongly.

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.

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. Thank you for reading.