Here's What Fauquier Bankshares, Inc.'s (NASDAQ:FBSS) P/E Ratio Is Telling Us

Fauquier Bankshares (NASDAQ:FBSS) shares have given back plenty of recent gains in the last month, dropping . Looking back over the last year, the stock has been a solid performer, with a gain of 16%.

Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. So some would prefer to hold off buying when there is a lot of optimism towards a stock. Perhaps the simplest way to get a read on investors' expectations of a business is to look at its Price to Earnings Ratio (PE Ratio). A high P/E ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.

View our latest analysis for Fauquier Bankshares

Does Fauquier Bankshares Have A Relatively High Or Low P/E For Its Industry?

Fauquier Bankshares's P/E of 11.64 indicates relatively low sentiment towards the stock. We can see in the image below that the average P/E (13.1) for companies in the banks industry is higher than Fauquier Bankshares's P/E.

This suggests that market participants think Fauquier Bankshares will underperform other companies in its industry. Since the market seems unimpressed with Fauquier Bankshares, it's quite possible it could surprise on the upside. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.

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. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

Fauquier Bankshares's earnings made like a rocket, taking off 69% last year.

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. In other words, it does not consider any debt or cash that the company may have on the balance sheet. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.

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 Fauquier Bankshares's Balance Sheet Tell Us?

Fauquier Bankshares has net cash of US$26m. This is fairly high at 33% of its market capitalization. That might mean balance sheet strength is important to the business, but should also help push the P/E a bit higher than it would otherwise be.

The Bottom Line On Fauquier Bankshares's P/E Ratio

Fauquier Bankshares has a P/E of 11.6. That's below the average in the US market, which is 18.9. Not only should the net cash position reduce risk, but the recent growth has been impressive. The relatively low P/E ratio implies the market is pessimistic. What can be absolutely certain is that the market has become less optimistic about Fauquier Bankshares over the last month, with the P/E ratio falling from 11.6 back then to 11.6 today. For those who don't like to trade against momentum, that could be a warning sign, but a contrarian investor might want to take a closer look.

When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. We don't have analyst forecasts, but shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.

You might be able to find a better buy than Fauquier Bankshares. 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).

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.