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The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll look at Provident Financial Holdings, Inc.’s (NASDAQ:PROV) P/E ratio and reflect on what it tells us about the company’s share price. What is Provident Financial Holdings’s P/E ratio? Well, based on the last twelve months it is 31.76. In other words, at today’s prices, investors are paying $31.76 for every $1 in prior year profit.
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Provident Financial Holdings:
P/E of 31.76 = $21.38 ÷ $0.67 (Based on the year to March 2019.)
Is A High Price-to-Earnings Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. 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.
How Does Provident Financial Holdings’s P/E Ratio Compare To Its Peers?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. As you can see below, Provident Financial Holdings has a higher P/E than the average company (14.5) in the mortgage industry.
Its relatively high P/E ratio indicates that Provident Financial Holdings shareholders think it will perform better than other companies in its industry classification.
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the ‘E’ will be lower. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
In the last year, Provident Financial Holdings grew EPS like Taylor Swift grew her fan base back in 2010; the 203% gain was both fast and well deserved. Unfortunately, earnings per share are down 6.9% a year, over 5 years.
Remember: P/E Ratios Don’t Consider The Balance Sheet
Don’t forget that the P/E ratio considers market capitalization. That means it doesn’t take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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).
Provident Financial Holdings’s Balance Sheet
Net debt totals 24% of Provident Financial Holdings’s 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 Provident Financial Holdings’s P/E Ratio
Provident Financial Holdings’s P/E is 31.8 which is above average (17.9) in its market. Its debt levels do not imperil its balance sheet and its EPS growth is very healthy indeed. So to be frank we are not surprised it has a high P/E ratio.
Investors have an opportunity when market expectations about a stock are wrong. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. 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.
You might be able to find a better buy than Provident Financial Holdings. 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 firstname.lastname@example.org. 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.