Here's What Village Bank and Trust Financial Corp.'s (NASDAQ:VBFC) P/E Ratio Is Telling Us
To the annoyance of some shareholders, Village Bank and Trust Financial (NASDAQ:VBFC) shares are down a considerable in the last month. Looking back over the last year, the stock has been a solid performer, with a gain of 19%.
All else being equal, a sharp share price increase should make a stock less attractive to potential investors. 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). So some would prefer to hold off buying when there is a lot of optimism towards a stock. 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.
See our latest analysis for Village Bank and Trust Financial
Does Village Bank and Trust Financial Have A Relatively High Or Low P/E For Its Industry?
Village Bank and Trust Financial has a P/E ratio of 12.90. As you can see below Village Bank and Trust Financial has a P/E ratio that is fairly close for the average for the banks industry, which is 12.2.
Its P/E ratio suggests that Village Bank and Trust Financial shareholders think that in the future it will perform about the same as other companies in its industry classification. So if Village Bank and Trust Financial actually outperforms its peers going forward, that should be a positive for the share price. Further research into factors such as insider buying and selling, could help you form your own view on whether that is likely.
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the 'E' will be lower. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.
Village Bank and Trust Financial's earnings made like a rocket, taking off 52% last year. Regrettably, the longer term performance is poor, with EPS down per year over 3 years.
Remember: P/E Ratios Don't Consider The Balance Sheet
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 investing in growth. That means taking on debt (or spending its cash).
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.
So What Does Village Bank and Trust Financial's Balance Sheet Tell Us?
Village Bank and Trust Financial's net debt is 1.9% of its market cap. The market might award it a higher P/E ratio if it had net cash, but its unlikely this low level of net borrowing is having a big impact on the P/E multiple.
The Bottom Line On Village Bank and Trust Financial's P/E Ratio
Village Bank and Trust Financial's P/E is 12.9 which is below average (17.2) in the US market. The EPS growth last year was strong, and debt levels are quite reasonable. The low P/E ratio suggests current market expectations are muted, implying these levels of growth will not continue. What can be absolutely certain is that the market has become less optimistic about Village Bank and Trust Financial over the last month, with the P/E ratio falling from 12.9 back then to 12.9 today. For those who don't like to trade against momentum, that could be a warning sign, but a contrarian investor might want to take a closer look.
Investors have an opportunity when market expectations about a stock are wrong. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. Although we don't have analyst forecasts shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.
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.
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.
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. Thank you for reading.
