Today, we’ll introduce the concept of the P/E ratio for those who are learning about investing. We’ll look at Southern Missouri Bancorp, Inc.’s (NASDAQ:SMBC) P/E ratio and reflect on what it tells us about the company’s share price. Southern Missouri Bancorp has a P/E ratio of 11.80, based on the last twelve months. That is equivalent to an earnings yield of about 8.5%.
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 Southern Missouri Bancorp:
P/E of 11.80 = $38.17 ÷ $3.24 (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 necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
Does Southern Missouri Bancorp Have A Relatively High Or Low P/E For Its Industry?
We can get an indication of market expectations by looking at the P/E ratio. If you look at the image below, you can see Southern Missouri Bancorp has a lower P/E than the average (14.4) in the mortgage industry classification.
Its relatively low P/E ratio indicates that Southern Missouri Bancorp shareholders think it will struggle to do as well as other companies in its industry classification. Many investors like to buy stocks when the market is pessimistic about their prospects. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
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. When earnings grow, the ‘E’ increases, over time. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Southern Missouri Bancorp increased earnings per share by a whopping 25% last year. And earnings per share have improved by 16% annually, over the last five years. With that performance, I would expect it to have an above average P/E ratio.
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. 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).
How Does Southern Missouri Bancorp’s Debt Impact Its P/E Ratio?
Net debt is 25% of Southern Missouri Bancorp’s market cap. You’d want to be aware of this fact, but it doesn’t bother us.
The Bottom Line On Southern Missouri Bancorp’s P/E Ratio
Southern Missouri Bancorp’s P/E is 11.8 which is below average (18.7) in the US market. The EPS growth last year was strong, and debt levels are quite reasonable. The low P/E ratio suggests current market expectations are muted, implying these levels of growth will not continue.
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. Although we don’t have analyst forecasts you might want to assess this data-rich visualization of earnings, revenue and cash flow.
But note: Southern Missouri Bancorp may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
If you spot an error that warrants correction, please contact the editor at email@example.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.
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