Unfortunately for some shareholders, the American National Bankshares (NASDAQ:AMNB) share price has dived 31% in the last thirty days. That drop has capped off a tough year for shareholders, with the share price down 37% in that time.
Assuming nothing else has changed, a lower share price makes a stock more attractive to potential buyers. In the long term, share prices tend to follow earnings per share, but in the short term prices bounce around in response to short term factors (which are not always obvious). The implication here is that long term investors have an opportunity when expectations of a company are too low. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). A high P/E ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.
How Does American National Bankshares's P/E Ratio Compare To Its Peers?
We can tell from its P/E ratio of 10.87 that there is some investor optimism about American National Bankshares. You can see in the image below that the average P/E (8.8) for companies in the banks industry is lower than American National Bankshares's P/E.
Its relatively high P/E ratio indicates that American National Bankshares shareholders think it will perform better than other companies in its industry classification. Shareholders are clearly optimistic, but the future is always uncertain. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. And in that case, the P/E ratio itself will drop rather quickly. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
American National Bankshares's earnings per share fell by 24% in the last twelve months. But EPS is up 4.2% over the last 5 years.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
The 'Price' in P/E reflects the market capitalization of the company. Thus, the metric does not reflect cash or debt held by the company. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.
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.
How Does American National Bankshares's Debt Impact Its P/E Ratio?
The extra options and safety that comes with American National Bankshares's US$225k net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.
The Bottom Line On American National Bankshares's P/E Ratio
American National Bankshares's P/E is 10.9 which is below average (12.9) in the US market. The recent drop in earnings per share would almost certainly temper expectations, the healthy balance sheet means the company retains potential for future growth. If that occurs, the current low P/E could prove to be temporary. What can be absolutely certain is that the market has become less optimistic about American National Bankshares over the last month, with the P/E ratio falling from 15.9 back then to 10.9 today. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for a contrarian, it may signal opportunity.
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 visual report on analyst forecasts could hold the key to an excellent investment decision.
Of course you might be able to find a better stock than American National Bankshares. So you may wish to see this free collection of other companies that have grown earnings strongly.
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.
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