This article is written for those who want to get better at using price to earnings ratios (P/E ratios). To keep it practical, we’ll show how Salisbury Bancorp, Inc.’s (NASDAQ:SAL) P/E ratio could help you assess the value on offer. Salisbury Bancorp has a price to earnings ratio of 13.65, based on the last twelve months. That means that at current prices, buyers pay $13.65 for every $1 in trailing yearly profits.
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 Salisbury Bancorp:
P/E of 13.65 = $43 ÷ $3.15 (Based on the year to December 2018.)
Is A High P/E Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each $1 of company earnings. 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
If earnings fall then in the future the ‘E’ will be lower. That means unless the share price falls, the P/E will increase in a few years. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
Salisbury Bancorp increased earnings per share by a whopping 40% last year. And earnings per share have improved by 6.2% annually, over the last five years. So we’d generally expect it to have a relatively high P/E ratio. But earnings per share are down 2.0% per year over the last three years.
How Does Salisbury 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 Salisbury Bancorp has a P/E ratio that is roughly in line with the banks industry average (13.2).
That indicates that the market expects Salisbury Bancorp will perform roughly in line with other companies in its industry. If the company has better than average prospects, then the market might be underestimating it. I inform my view byby checking management tenure and remuneration, among other things.
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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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.
Is Debt Impacting Salisbury Bancorp’s P/E?
Net debt totals 22% of Salisbury Bancorp’s market cap. 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 Bottom Line On Salisbury Bancorp’s P/E Ratio
Salisbury Bancorp trades on a P/E ratio of 13.7, which is below the US market average of 17.7. The company does have a little debt, and EPS growth was good last year. If it continues to grow, then the current low P/E may prove to be unjustified.
Investors should be looking to buy stocks that the market is wrong about. 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.
You might be able to find a better buy than Salisbury Bancorp. 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).
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.