A Sliding Share Price Has Us Looking At Village Bank and Trust Financial Corp.'s (NASDAQ:VBFC) P/E Ratio

To the annoyance of some shareholders, Village Bank and Trust Financial (NASDAQ:VBFC) shares are down a considerable 34% in the last month. Even longer term holders have taken a real hit with the stock declining 23% in the last year.

All else being equal, a share price drop should make a stock more attractive to potential investors. 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 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 Village Bank and Trust Financial

How Does Village Bank and Trust Financial's P/E Ratio Compare To Its Peers?

We can tell from its P/E ratio of 8.16 that sentiment around Village Bank and Trust Financial isn't particularly high. We can see in the image below that the average P/E (8.9) for companies in the banks industry is higher than Village Bank and Trust Financial's P/E.

Its relatively low P/E ratio indicates that Village Bank and Trust Financial shareholders think it will struggle to do as well as other companies in its industry classification. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.

How Growth Rates Impact P/E Ratios

When earnings fall, the 'E' decreases, over time. That means even if the current P/E is low, it will increase over time if the share price stays flat. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.

In the last year, Village Bank and Trust Financial grew EPS like Taylor Swift grew her fan base back in 2010; the 52% gain was both fast and well deserved. Unfortunately, earnings per share are down 30% a year, over 3 years.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

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).

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.

Village Bank and Trust Financial's Balance Sheet

Net debt totals 78% of Village Bank and Trust Financial's market cap. If you want to compare its P/E ratio to other companies, you should absolutely keep in mind it has significant borrowings.

The Verdict On Village Bank and Trust Financial's P/E Ratio

Village Bank and Trust Financial has a P/E of 8.2. That's below the average in the US market, which is 13.1. 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 Village Bank and Trust Financial over the last month, with the P/E ratio falling from 12.3 back then to 8.2 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. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. We don't have analyst forecasts, but you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.

You might be able to find a better buy than Village Bank and Trust Financial. 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.