Despite Its High P/E Ratio, Is Peoples Bancorp of North Carolina, Inc. (NASDAQ:PEBK) Still Undervalued?

Today, we’ll introduce the concept of the P/E ratio for those who are learning about investing. To keep it practical, we’ll show how Peoples Bancorp of North Carolina, Inc.’s (NASDAQ:PEBK) P/E ratio could help you assess the value on offer. What is Peoples Bancorp of North Carolina’s P/E ratio? Well, based on the last twelve months it is 12.87. That is equivalent to an earnings yield of about 7.8%.

View our latest analysis for Peoples Bancorp of North Carolina

How Do You Calculate A P/E Ratio?

The formula for price to earnings is:

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

Or for Peoples Bancorp of North Carolina:

P/E of 12.87 = $30.95 ÷ $2.40 (Based on the trailing twelve months to June 2019.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio implies that investors pay a higher price for the earning power of the business. All else being equal, it’s better to pay a low price — but as Warren Buffett said, ‘It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.

Does Peoples Bancorp of North Carolina Have A Relatively High Or Low P/E For Its Industry?

The P/E ratio essentially measures market expectations of a company. As you can see below Peoples Bancorp of North Carolina has a P/E ratio that is fairly close for the average for the banks industry, which is 12.6.

NasdaqGM:PEBK Price Estimation Relative to Market, October 22nd 2019
NasdaqGM:PEBK Price Estimation Relative to Market, October 22nd 2019

Its P/E ratio suggests that Peoples Bancorp of North Carolina shareholders think that in the future it will perform about the same as other companies in its industry classification.

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. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

Peoples Bancorp of North Carolina increased earnings per share by an impressive 23% over the last twelve months. And earnings per share have improved by 13% annually, over the last five years. So one might expect an above average P/E ratio. The market might therefore be optimistic about the future, but that doesn’t guarantee future growth. So further research is always essential. I often monitor director buying and selling.

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

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. 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).

While growth expenditure doesn’t always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.

Is Debt Impacting Peoples Bancorp of North Carolina’s P/E?

Peoples Bancorp of North Carolina has net debt worth 23% of its market capitalization. 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 Peoples Bancorp of North Carolina’s P/E Ratio

Peoples Bancorp of North Carolina’s P/E is 12.9 which is below average (17.6) in the US market. The company does have a little debt, and EPS growth was good last year. If the company can continue to grow earnings, then the current P/E may be unjustifiably low.

Investors have an opportunity when market expectations about a stock are wrong. As value investor Benjamin Graham famously said, ‘In the short run, the market is a voting machine but in the long run, it is a weighing machine. We don’t have analyst forecasts, but shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.

But note: Peoples Bancorp of North Carolina 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).

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.