This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll show how you can use Peapack-Gladstone Financial Corporation’s (NASDAQ:PGC) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Peapack-Gladstone Financial’s P/E ratio is 11.35. In other words, at today’s prices, investors are paying $11.35 for every $1 in prior year profit.
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How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Peapack-Gladstone Financial:
P/E of 11.35 = $26.58 ÷ $2.34 (Based on the year to September 2018.)
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. 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 Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. Earnings growth means that in the future the ‘E’ will be higher. 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.
Peapack-Gladstone Financial increased earnings per share by an impressive 21% over the last twelve months. And its annual EPS growth rate over 5 years is 18%. This could arguably justify a relatively high P/E ratio.
How Does Peapack-Gladstone Financial’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. We can see in the image below that the average P/E (14.6) for companies in the banks industry is higher than Peapack-Gladstone Financial’s P/E.
This suggests that market participants think Peapack-Gladstone Financial will underperform other companies in its industry. Since the market seems unimpressed with Peapack-Gladstone Financial, it’s quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don’t forget that the P/E ratio considers market capitalization. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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.
How Does Peapack-Gladstone Financial’s Debt Impact Its P/E Ratio?
Peapack-Gladstone Financial has net debt worth 29% of its market capitalization. If you want to compare its P/E ratio to other companies, you should absolutely keep in mind it has significant borrowings.
The Bottom Line On Peapack-Gladstone Financial’s P/E Ratio
Peapack-Gladstone Financial’s P/E is 11.3 which is below average (16.8) in the US market. The EPS growth last year was strong, and debt levels are quite reasonable. If the company can continue to grow earnings, then the current P/E may be unjustifiably low. Since analysts are predicting growth will continue, one might expect to see a higher P/E so it may be worth looking closer.
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.’ So this free report on the analyst consensus forecasts could help you make a master move on this stock.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
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.