Village Bank and Trust Financial (NASDAQ:VBFC) shares have retraced a considerable in the last month. But plenty of shareholders will still be smiling, given that the stock is up 11% over the last quarter. The stock has been solid, longer term, gaining 18% in the last year.
Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. The implication here is that deep value investors might steer clear when expectations of a company are too high. 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.
Check out our latest analysis for Village Bank and Trust Financial
How Does Village Bank and Trust Financial’s P/E Ratio Compare To Its Peers?
Village Bank and Trust Financial has a P/E ratio of 12.45. The image below shows that Village Bank and Trust Financial has a P/E ratio that is roughly in line with the banks industry average (12.5).
NasdaqCM:VBFC Price Estimation Relative to Market, February 10th 2020
That indicates that the market expects Village Bank and Trust Financial will perform roughly in line with other companies in its industry. If the company has better than average prospects, then the market might be underestimating it. Checking factors such as director buying and selling. could help you form your own view on if that will happen.
How Growth Rates Impact P/E Ratios
When earnings fall, the ‘E’ decreases, over time. That means even if the current P/E is low, it will increase over time if the share price stays flat. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
In the last year, Village Bank and Trust Financial grew EPS like Taylor Swift grew her fan base back in 2010; the 52% gain was both fast and well deserved. Unfortunately, earnings per share are down 30% a year, over 3 years.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don’t forget that the P/E ratio considers market capitalization. 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).
Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).
Village Bank and Trust Financial’s Balance Sheet
Net debt totals just 2.0% of Village Bank and Trust Financial’s market cap. It would probably trade on a higher P/E ratio if it had a lot of cash, but I doubt it is having a big impact.
The Verdict On Village Bank and Trust Financial’s P/E Ratio
Village Bank and Trust Financial’s P/E is 12.4 which is below average (18.4) in the US market. The company does have a little debt, and EPS growth was good last year. 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 12.4 back then to 12.4 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.
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. We don’t have analyst forecasts, but you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.
But note: Village Bank and Trust Financial may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio 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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