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How Does Signature Bank's (NASDAQ:SBNY) P/E Compare To Its Industry, After The Share Price Drop?

Unfortunately for some shareholders, the Signature Bank (NASDAQ:SBNY) share price has dived 50% in the last thirty days. That drop has capped off a tough year for shareholders, with the share price down 43% in that time.

Assuming nothing else has changed, a lower share price makes a stock more 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 long term investors have an opportunity when expectations of a company are too low. 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.

View our latest analysis for Signature Bank

How Does Signature Bank's P/E Ratio Compare To Its Peers?

We can tell from its P/E ratio of 6.69 that sentiment around Signature Bank isn't particularly high. If you look at the image below, you can see Signature Bank has a lower P/E than the average (8.3) in the banks industry classification.

NasdaqGS:SBNY Price Estimation Relative to Market, March 24th 2020
NasdaqGS:SBNY Price Estimation Relative to Market, March 24th 2020

This suggests that market participants think Signature Bank will underperform other companies in its industry. Since the market seems unimpressed with Signature Bank, it's quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or 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. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. Then, a lower P/E should attract more buyers, pushing the share price up.

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It's great to see that Signature Bank grew EPS by 18% in the last year. And its annual EPS growth rate over 5 years is 13%. This could arguably justify a relatively high P/E ratio.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

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).

Signature Bank's Balance Sheet

Net debt totals 93% of Signature Bank's market cap. This is a reasonably significant level of debt -- all else being equal you'd expect a much lower P/E than if it had net cash.

The Verdict On Signature Bank's P/E Ratio

Signature Bank's P/E is 6.7 which is below average (11.5) in the US market. The company has a meaningful amount of debt on the balance sheet, but that should not eclipse the solid earnings growth. If the company can continue to grow earnings, then the current P/E may be unjustifiably low. Given Signature Bank's P/E ratio has declined from 13.3 to 6.7 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.

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

Of course you might be able to find a better stock than Signature Bank. So you may wish to see this free collection of other companies that have grown earnings strongly.

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.