A Sliding Share Price Has Us Looking At Bryn Mawr Bank Corporation's (NASDAQ:BMTC) P/E Ratio

Unfortunately for some shareholders, the Bryn Mawr Bank (NASDAQ:BMTC) share price has dived 35% in the last thirty days. Indeed the recent decline has arguably caused some bitterness for shareholders who have held through the 34% drop over twelve months.

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). So, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). A high P/E implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.

View our latest analysis for Bryn Mawr Bank

Does Bryn Mawr Bank Have A Relatively High Or Low P/E For Its Industry?

Bryn Mawr Bank's P/E of 8.61 indicates relatively low sentiment towards the stock. The image below shows that Bryn Mawr Bank has a lower P/E than the average (9.7) P/E for companies in the banks industry.

Bryn Mawr Bank's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with Bryn Mawr Bank, it's quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.

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. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

Bryn Mawr Bank's earnings per share fell by 6.8% in the last twelve months. But over the longer term (5 years) earnings per share have increased by 7.4%.

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. So it won't reflect the advantage of cash, or disadvantage of debt. 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 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 Bryn Mawr Bank's Debt Impact Its P/E Ratio?

Bryn Mawr Bank has net debt worth a very significant 125% of its market capitalization. This is a relatively high level of debt, so the stock probably deserves a relatively low P/E ratio. Keep that in mind when comparing it to other companies.

The Verdict On Bryn Mawr Bank's P/E Ratio

Bryn Mawr Bank has a P/E of 8.6. That's below the average in the US market, which is 13.3. When you consider that the company has significant debt, and didn't grow EPS last year, it isn't surprising that the market has muted expectations. Given Bryn Mawr Bank's P/E ratio has declined from 13.2 to 8.6 in the last month, we know for sure that the market is more worried about the business today, than it was back then. For those who prefer invest in growth, this stock apparently offers limited promise, but the deep value investors may find the pessimism around this stock enticing.

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

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.

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