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 Sandy Spring Bancorp, Inc.’s (NASDAQ:SASR) P/E ratio to inform your assessment of the investment opportunity. Sandy Spring Bancorp has a price to earnings ratio of 10.89, based on the last twelve months. That means that at current prices, buyers pay $10.89 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 = Share Price ÷ Earnings per Share (EPS)
Or for Sandy Spring Bancorp:
P/E of 10.89 = $34.56 ÷ $3.17 (Based on the year to June 2019.)
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 is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
How Does Sandy Spring Bancorp’s P/E Ratio Compare To Its Peers?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. The image below shows that Sandy Spring Bancorp has a lower P/E than the average (12.3) P/E for companies in the banks industry.
This suggests that market participants think Sandy Spring Bancorp will underperform other companies in its industry.
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. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. That means unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.
Sandy Spring Bancorp increased earnings per share by a whopping 37% last year. And earnings per share have improved by 15% annually, over the last five years. With that performance, I would expect it to have an above average P/E ratio.
Remember: P/E Ratios Don’t Consider The Balance Sheet
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.
Sandy Spring Bancorp’s Balance Sheet
Net debt is 44% of Sandy Spring Bancorp’s market cap. While that’s enough to warrant consideration, it doesn’t really concern us.
The Verdict On Sandy Spring Bancorp’s P/E Ratio
Sandy Spring Bancorp’s P/E is 10.9 which is below average (17.2) in the US market. The company hasn’t stretched its balance sheet, and earnings growth was good last year. If it continues to grow, then the current low P/E may prove to be unjustified.
When the market is wrong about a stock, it gives savvy investors an opportunity. 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.
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If you spot an error that warrants correction, please contact the editor at email@example.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.