Despite Its High P/E Ratio, Is LCNB Corp. (NASDAQ:LCNB) Still Undervalued?

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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll look at LCNB Corp.’s (NASDAQ:LCNB) P/E ratio and reflect on what it tells us about the company’s share price. Based on the last twelve months, LCNB’s P/E ratio is 13.8. That is equivalent to an earnings yield of about 7.2%.

Check out our latest analysis for LCNB

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 LCNB:

P/E of 13.8 = $18.12 ÷ $1.31 (Based on the year to March 2019.)

Is A High P/E Ratio Good?

A higher P/E ratio implies that investors pay a higher price for the earning power of the business. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.

How Growth Rates Impact P/E Ratios

Generally speaking the rate of earnings growth has a profound impact on a company’s P/E multiple. If earnings are growing quickly, then the ‘E’ in the equation will increase faster than it would otherwise. That means unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.

LCNB saw earnings per share improve by -5.7% last year. And its annual EPS growth rate over 5 years is 5.4%.

How Does LCNB’s P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. The image below shows that LCNB has a higher P/E than the average (12.7) P/E for companies in the banks industry.

NasdaqCM:LCNB Price Estimation Relative to Market, June 24th 2019
NasdaqCM:LCNB Price Estimation Relative to Market, June 24th 2019

Its relatively high P/E ratio indicates that LCNB shareholders think it will perform better than other companies in its industry classification. Clearly the market expects growth, but it isn’t guaranteed. So further research is always essential. I often monitor director buying and selling.

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

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

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 LCNB’s Balance Sheet Tell Us?

Net debt totals just 9.4% of LCNB’s market cap. So it doesn’t have as many options as it would with net cash, but its debt would not have much of an impact on its P/E ratio.

The Verdict On LCNB’s P/E Ratio

LCNB has a P/E of 13.8. That’s below the average in the US market, which is 17.9. EPS grew over the last twelve months, and debt levels are quite reasonable. If growth is sustainable over the long term, then the current P/E ratio may be a sign of good value.

Investors have an opportunity when market expectations about a stock are wrong. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

You might be able to find a better buy than LCNB. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

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.