Is Atlantic Capital Bancshares Inc’s (NASDAQ:ACBI) High P/E Ratio A Problem For Investors?

This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). To keep it practical, we’ll show how Atlantic Capital Bancshares Inc’s (NASDAQ:ACBI) P/E ratio could help you assess the value on offer. Based on the last twelve months, Atlantic Capital Bancshares’s P/E ratio is 90.54. That is equivalent to an earnings yield of about 1.1%.

See our latest analysis for Atlantic Capital Bancshares

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 Atlantic Capital Bancshares:

P/E of 90.54 = $15.26 ÷ $0.17 (Based on the trailing twelve months to September 2018.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that buyers have to pay a higher price for each $1 the company has earned over the last year. 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.

How Growth Rates Impact P/E Ratios

Companies that shrink earnings per share quickly will rapidly decrease the ‘E’ in the equation. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. A higher P/E should indicate the stock is expensive relative to others — and that may encourage shareholders to sell.

Atlantic Capital Bancshares saw earnings per share decrease by 68% last year. And it has shrunk its earnings per share by 26% per year over the last five years. This might lead to muted expectations.

How Does Atlantic Capital Bancshares’s P/E Ratio Compare To Its Peers?

We can get an indication of market expectations by looking at the P/E ratio. As you can see below, Atlantic Capital Bancshares has a much higher P/E than the average company (15.4) in the banks industry.

NasdaqGS:ACBI PE PEG Gauge October 30th 18
NasdaqGS:ACBI PE PEG Gauge October 30th 18

That means that the market expects Atlantic Capital Bancshares will outperform other companies in its industry. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and selling.

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

The ‘Price’ in P/E reflects the market capitalization of the company. Thus, the metric does not reflect cash or debt held by the company. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.

Is Debt Impacting Atlantic Capital Bancshares’s P/E?

Since Atlantic Capital Bancshares holds net cash of US$48m, it can spend on growth, justifying a higher P/E ratio than otherwise.

The Verdict On Atlantic Capital Bancshares’s P/E Ratio

Atlantic Capital Bancshares trades on a P/E ratio of 90.5, which is multiples above the US market average of 18.1. Falling earnings per share is probably keeping traditional value investors away, but the net cash position means the company has time to improve: and the high P/E suggests the market thinks it will.

Investors should be looking to buy stocks that the market is wrong about. People often underestimate remarkable growth — so investors can make money when fast growth is not fully appreciated. 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 Atlantic Capital Bancshares. 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).

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.