Should You Be Tempted To Sell TriCo Bancshares (NASDAQ:TCBK) Because Of Its P/E Ratio?

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 TriCo Bancshares’s (NASDAQ:TCBK) P/E ratio to inform your assessment of the investment opportunity. TriCo Bancshares has a P/E ratio of 15.43, based on the last twelve months. That corresponds to an earnings yield of approximately 6.5%.

Check out our latest analysis for TriCo Bancshares

How Do I Calculate A Price To Earnings Ratio?

The formula for P/E is:

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

Or for TriCo Bancshares:

P/E of 15.43 = $39.64 ÷ $2.57 (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 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

Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the ‘E’ will be higher. That means unless the share price increases, the P/E will reduce in a few years. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

It’s nice to see that TriCo Bancshares grew EPS by a stonking 45% in the last year. And it has bolstered its earnings per share by 7.1% per year over the last five years. I’d therefore be a little surprised if its P/E ratio was not relatively high.

How Does TriCo 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. As you can see below, TriCo Bancshares has a higher P/E than the average company (13) in the banks industry.

NasdaqGS:TCBK Price Estimation Relative to Market, April 2nd 2019
NasdaqGS:TCBK Price Estimation Relative to Market, April 2nd 2019

That means that the market expects TriCo Bancshares will outperform other companies in its industry. The market is optimistic about the future, but that doesn’t guarantee future growth. So investors should delve deeper. I like to check if company insiders have been buying or selling.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

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. Theoretically, a business can improve its earnings (and produce a lower P/E in the future), by taking on debt (or spending its remaining cash).

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 TriCo Bancshares’s Debt Impact Its P/E Ratio?

TriCo Bancshares has net cash of US$35m. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.

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

TriCo Bancshares trades on a P/E ratio of 15.4, which is below the US market average of 17.8. It grew its EPS nicely over the last year, and the healthy balance sheet implies there is more potential for growth. The below average P/E ratio suggests that market participants don’t believe the strong growth will continue. 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. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. 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 TriCo 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.