Despite Its High P/E Ratio, Is Bank of Marin Bancorp (NASDAQ:BMRC) Still Undervalued?

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Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll show how you can use Bank of Marin Bancorp's (NASDAQ:BMRC) P/E ratio to inform your assessment of the investment opportunity. Bank of Marin Bancorp has a price to earnings ratio of 17.69, based on the last twelve months. That means that at current prices, buyers pay $17.69 for every $1 in trailing yearly profits.

View our latest analysis for Bank of Marin Bancorp

How Do You Calculate A P/E Ratio?

The formula for P/E is:

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

Or for Bank of Marin Bancorp:

P/E of 17.69 = $43.09 ÷ $2.44 (Based on the trailing twelve months to March 2019.)

Is A High P/E Ratio Good?

The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.

How Growth Rates Impact P/E Ratios

Probably the most important factor in determining what P/E a company trades on is the earnings growth. 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. Then, a lower P/E should attract more buyers, pushing the share price up.

Bank of Marin Bancorp's 75% EPS improvement over the last year was like bamboo growth after rain; rapid and impressive. Having said that, the average EPS growth over the last three years wasn't so good, coming in at 14%.

How Does Bank of Marin Bancorp's P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. The image below shows that Bank of Marin Bancorp has a higher P/E than the average (13.1) P/E for companies in the banks industry.

That means that the market expects Bank of Marin Bancorp will outperform other companies in its industry. Clearly the market expects growth, but it isn't guaranteed. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. That means it doesn't take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.

How Does Bank of Marin Bancorp's Debt Impact Its P/E Ratio?

Since Bank of Marin Bancorp holds net cash of US$34m, it can spend on growth, justifying a higher P/E ratio than otherwise.

The Verdict On Bank of Marin Bancorp's P/E Ratio

Bank of Marin Bancorp's P/E is 17.7 which is about average (18.4) in the US market. The excess cash it carries is the gravy on top its fast EPS growth. So based on this analysis we'd expect Bank of Marin Bancorp to have a higher P/E ratio.

Investors should be looking to buy stocks that the market is wrong about. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this freereport on the analyst consensus forecasts could help you make a master move on this stock.

Of course you might be able to find a better stock than Bank of Marin Bancorp. So you may wish to see this freecollection of other companies that have grown earnings strongly.

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 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. Thank you for reading.