Here's How P/E Ratios Can Help Us Understand Lakeland Bancorp, Inc. (NASDAQ:LBAI)

January 19, 2020

This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll show how you can use Lakeland Bancorp, Inc.'s (NASDAQ:LBAI) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Lakeland Bancorp's P/E ratio is 12.61. That is equivalent to an earnings yield of about 7.9%.

View our latest analysis for Lakeland Bancorp

How Do I Calculate A Price To Earnings Ratio?

The formula for P/E is:

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

Or for Lakeland Bancorp:

P/E of 12.61 = USD16.97 ÷ USD1.35 (Based on the year to September 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 isn't a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business's prospects, relative to stocks with a lower P/E.

Does Lakeland Bancorp Have A Relatively High Or Low P/E For Its Industry?

The P/E ratio essentially measures market expectations of a company. As you can see below Lakeland Bancorp has a P/E ratio that is fairly close for the average for the banks industry, which is 12.8.

NasdaqGS:LBAI Price Estimation Relative to Market, January 20th 2020

Its P/E ratio suggests that Lakeland Bancorp shareholders think that in the future it will perform about the same as other companies in its industry classification. If the company has better than average prospects, then the market might be underestimating it. Checking factors such as director buying and selling. could help you form your own view on if that will happen.

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. Earnings growth means that in the future the 'E' will be higher. And in that case, the P/E ratio itself will drop rather quickly. Then, a lower P/E should attract more buyers, pushing the share price up.

Lakeland Bancorp's earnings per share grew by -5.8% in the last twelve months. And earnings per share have improved by 11% annually, over the last five years.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. So it won't reflect the advantage of cash, or disadvantage of debt. 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).

Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).

So What Does Lakeland Bancorp's Balance Sheet Tell Us?

Net debt totals 23% of Lakeland Bancorp's market cap. It would probably deserve a higher P/E ratio if it was net cash, since it would have more options for growth.

The Bottom Line On Lakeland Bancorp's P/E Ratio

Lakeland Bancorp trades on a P/E ratio of 12.6, which is below the US market average of 19.0. The company does have a little debt, and EPS is moving in the right direction. The P/E ratio implies the market is cautious about longer term prospects.

When the market is wrong about a stock, it gives savvy investors an opportunity. 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 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 Lakeland 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.