A Sliding Share Price Has Us Looking At Investar Holding Corporation's (NASDAQ:ISTR) P/E Ratio

To the annoyance of some shareholders, Investar Holding (NASDAQ:ISTR) shares are down a considerable 33% in the last month. That drop has capped off a tough year for shareholders, with the share price down 47% 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. 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 Investar Holding

Does Investar Holding Have A Relatively High Or Low P/E For Its Industry?

We can tell from its P/E ratio of 7.27 that sentiment around Investar Holding isn't particularly high. If you look at the image below, you can see Investar Holding has a lower P/E than the average (8.8) in the banks industry classification.

Investar Holding'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 Investar Holding, 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. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. And in that case, the P/E ratio itself will drop rather quickly. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Most would be impressed by Investar Holding earnings growth of 19% in the last year. And it has bolstered its earnings per share by 11% per year over the last five years. With that performance, you might expect an above average P/E ratio.

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. Thus, the metric does not reflect cash or debt held by the company. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

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).

How Does Investar Holding's Debt Impact Its P/E Ratio?

Investar Holding's net debt is considerable, at 105% of its 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 Verdict On Investar Holding's P/E Ratio

Investar Holding trades on a P/E ratio of 7.3, which is below the US market average of 13.3. The company has a meaningful amount of debt on the balance sheet, but that should not eclipse the solid earnings growth. 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 more pessimistic about Investar Holding over the last month, with the P/E ratio falling from 10.9 back then to 7.3 today. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for deep value investors this stock might justify some research.

Investors should be looking to buy stocks that the market is wrong about. 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. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.

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.

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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