Yahoo Finance Do You Know What Kentucky First Federal Bancorp's (NASDAQ:KFFB) P/E Ratio Means?
Unfortunately for some shareholders, the Kentucky First Federal Bancorp (NASDAQ:KFFB) share price has dived in the last thirty days. Looking back further, the stock is up 2.7% 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. 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). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.
View our latest analysis for Kentucky First Federal Bancorp
Does Kentucky First Federal Bancorp Have A Relatively High Or Low P/E For Its Industry?
Kentucky First Federal Bancorp's P/E of 64.52 indicates some degree of optimism towards the stock. The image below shows that Kentucky First Federal Bancorp has a significantly higher P/E than the average (13.9) P/E for companies in the mortgage industry.
That means that the market expects Kentucky First Federal Bancorp will outperform other companies in its industry. Clearly the market expects growth, but it isn't guaranteed. 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
Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. 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, Kentucky First Federal Bancorp grew EPS like Taylor Swift grew her fan base back in 2010; the 108% gain was both fast and well deserved. Regrettably, the longer term performance is poor, with EPS down 12% per year over 5 years.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
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. 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.
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.
Kentucky First Federal Bancorp's Balance Sheet
Kentucky First Federal Bancorp has net debt worth 73% of its market capitalization. This is enough debt that you'd have to make some adjustments before using the P/E ratio to compare it to a company with net cash.
The Verdict On Kentucky First Federal Bancorp's P/E Ratio
Kentucky First Federal Bancorp's P/E is 64.5 which suggests the market is more focussed on the future opportunity rather than the current level of earnings. Its meaningful level of debt should warrant a lower P/E ratio, but the fast EPS growth is a positive. So despite the debt it is, perhaps, not unreasonable to see a high P/E ratio. What can be absolutely certain is that the market has become less optimistic about Kentucky First Federal Bancorp over the last month, with the P/E ratio falling from 64.5 back then to 64.5 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 should be looking to buy stocks that the market is wrong about. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. We don't have analyst forecasts, but shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.
But note: Kentucky First Federal Bancorp 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.
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.
