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A Rising Share Price Has Us Looking Closely At Sterling Bancorp's (NYSE:STL) P/E Ratio

Sterling Bancorp (NYSE:STL) shareholders are no doubt pleased to see that the share price has bounced 34% in the last month alone, although it is still down 52% over the last quarter. However, that doesn't change the fact that longer term shareholders might have been mercilessly wrecked by the 51% share price decline throughout the 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.

Check out our latest analysis for Sterling Bancorp

Does Sterling Bancorp Have A Relatively High Or Low P/E For Its Industry?

Sterling Bancorp's P/E of 4.93 indicates relatively low sentiment towards the stock. The image below shows that Sterling Bancorp has a lower P/E than the average (8.7) P/E for companies in the banks industry.

NYSE:STL Price Estimation Relative to Market April 22nd 2020
NYSE:STL Price Estimation Relative to Market April 22nd 2020

Sterling Bancorp'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 Sterling Bancorp, 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

Probably the most important factor in determining what P/E a company trades on is the earnings growth. 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. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

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Sterling Bancorp increased earnings per share by 4.0% last year. And it has bolstered its earnings per share by 23% per year over the last five years.

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

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. 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).

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.

Is Debt Impacting Sterling Bancorp's P/E?

Net debt totals a substantial 139% of Sterling Bancorp's market cap. 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 Sterling Bancorp's P/E Ratio

Sterling Bancorp trades on a P/E ratio of 4.9, which is below the US market average of 13.3. The meaningful debt load is probably contributing to low expectations, even though it has improved earnings recently. What is very clear is that the market has become less pessimistic about Sterling Bancorp over the last month, with the P/E ratio rising from 3.7 back then to 4.9 today. If you like to buy stocks that could be turnaround opportunities, then this one might be a candidate; but if you're more sensitive to price, then you may feel the opportunity has passed.

Investors should be looking to buy stocks that the market is wrong about. 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.

You might be able to find a better buy than Sterling Bancorp. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

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.