Why Southside Bancshares, Inc.’s (NASDAQ:SBSI) High P/E Ratio Isn’t Necessarily A Bad Thing

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 Southside Bancshares, Inc.’s (NASDAQ:SBSI) P/E ratio to inform your assessment of the investment opportunity. Southside Bancshares has a price to earnings ratio of 16.09, based on the last twelve months. That means that at current prices, buyers pay $16.09 for every $1 in trailing yearly profits.

Check out our latest analysis for Southside Bancshares

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 Southside Bancshares:

P/E of 16.09 = $34.12 ÷ $2.12 (Based on the trailing twelve months to December 2018.)

Is A High P/E Ratio Good?

A higher P/E ratio implies that investors pay a higher price for the earning power of the business. That isn’t necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in 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. 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. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.

Southside Bancshares increased earnings per share by an impressive 17% over the last twelve months. And earnings per share have improved by 5.9% annually, over the last five years. So one might expect an above average P/E ratio.

How Does Southside Bancshares’s P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. You can see in the image below that the average P/E (13.3) for companies in the banks industry is lower than Southside Bancshares’s P/E.

NasdaqGS:SBSI Price Estimation Relative to Market, March 7th 2019
NasdaqGS:SBSI Price Estimation Relative to Market, March 7th 2019

That means that the market expects Southside Bancshares will outperform other companies in its industry. Clearly the market expects growth, but it isn’t guaranteed. 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

It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. In other words, it does not consider any debt or cash that the company may have on the balance sheet. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

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.

Is Debt Impacting Southside Bancshares’s P/E?

Southside Bancshares has net debt worth 72% of its market capitalization. This is enough debt that you’d have to make some adjustments before using the P/E ratio to compare it to a company with net cash.

The Bottom Line On Southside Bancshares’s P/E Ratio

Southside Bancshares trades on a P/E ratio of 16.1, which is below the US market average of 17.5. While the EPS growth last year was strong, the significant debt levels reduce the number of options available to management. If the company can continue to grow earnings, then the current P/E may be unjustifiably low.

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 visual report on analyst forecasts could hold the key to an excellent investment decision.

You might be able to find a better buy than Southside Bancshares. 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).

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.