Yahoo Finance How Does ESSA Bancorp's (NASDAQ:ESSA) P/E Compare To Its Industry, After Its Big Share Price Gain?
ESSA Bancorp (NASDAQ:ESSA) shareholders are no doubt pleased to see that the share price has bounced 31% in the last month alone, although it is still down 9.4% over the last quarter. But that gain wasn't enough to make shareholders whole, as the share price is still down 3.2% 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. So some would prefer to hold off buying when there is a lot of optimism towards a stock. Perhaps the simplest way to get a read on investors' expectations of a business 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 ESSA Bancorp
Does ESSA Bancorp Have A Relatively High Or Low P/E For Its Industry?
ESSA Bancorp's P/E is 11.62. As you can see below ESSA Bancorp has a P/E ratio that is fairly close for the average for the mortgage industry, which is 11.1.
Its P/E ratio suggests that ESSA Bancorp shareholders think that in the future it will perform about the same as other companies in its industry classification. So if ESSA Bancorp actually outperforms its peers going forward, that should be a positive for the share price. 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
Probably the most important factor in determining what P/E a company trades on is the earnings growth. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. That means unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.
Most would be impressed by ESSA Bancorp earnings growth of 19% in the last year. And earnings per share have improved by 6.4% annually, over the last five years. This could arguably justify a relatively high P/E ratio.
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. 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).
While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.
So What Does ESSA Bancorp's Balance Sheet Tell Us?
Net debt totals a substantial 150% of ESSA Bancorp's market cap. If you want to compare its P/E ratio to other companies, you must keep in mind that these debt levels would usually warrant a relatively low P/E.
The Bottom Line On ESSA Bancorp's P/E Ratio
ESSA Bancorp has a P/E of 11.6. That's below the average in the US market, which is 15.6. The company may have significant debt, but EPS growth was good last year. If it continues to grow, then the current low P/E may prove to be unjustified. What is very clear is that the market has become more optimistic about ESSA Bancorp over the last month, with the P/E ratio rising from 8.9 back then to 11.6 today. For those who prefer to invest with the flow of momentum, that might mean it's time to put the stock on a watchlist, or research it. But the contrarian may see it as a missed opportunity.
When the market is wrong about a stock, it gives savvy investors an opportunity. 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.
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.
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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.
