Greene County Bancorp Inc (NASDAQ:GCBC) is trading with a trailing P/E of 23.7x, which is higher than the industry average of 19.6x. While GCBC might seem like a stock to avoid or sell if you own it, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. Today, I will explain what the P/E ratio is as well as what you should look out for when using it. Check out our latest analysis for Greene County Bancorp
What you need to know about the P/E ratio
A common ratio used for relative valuation is the P/E ratio. It compares a stock’s price per share to the stock’s earnings per share. A more intuitive way of understanding the P/E ratio is to think of it as how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for GCBC
Price-Earnings Ratio = Price per share ÷ Earnings per share
GCBC Price-Earnings Ratio = 31.25 ÷ 1.317 = 23.7x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to GCBC, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use. GCBC’s P/E of 23.7x is higher than its industry peers (19.6x), which implies that each dollar of GCBC’s earnings is being overvalued by investors. As such, our analysis shows that GCBC represents an over-priced stock.
Assumptions to be aware of
However, before you rush out to sell your GCBC shares, it is important to note that this conclusion is based on two key assumptions. The first is that our “similar companies” are actually similar to GCBC, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with GCBC, then its P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing GCBC to are fairly valued by the market. If this does not hold, there is a possibility that GCBC’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
Are you a shareholder? You may have already conducted fundamental analysis on the stock as a shareholder, so its current overvaluation could signal a potential selling opportunity to reduce your exposure to GCBC. Now that you understand the ins and outs of the PE metric, you should know to bear in mind its limitations before you make an investment decision.
Are you a potential investor? If you are considering investing in GCBC, basing your decision on the PE metric at one point in time is certainly not sufficient. I recommend you do additional analysis by looking at its intrinsic valuation and using other relative valuation ratios like PEG or EV/EBITDA.
PE is one aspect of your portfolio construction to consider when holding or entering into a stock. But it is certainly not the only factor. Take a look at our most recent infographic report on Greene County Bancorp for a more in-depth analysis of the stock to help you make a well-informed investment decision. Since we know a limitation of PE is it doesn’t properly account for growth, you can use our free platform to see my list of stocks with a high growth potential and see if their PE is still reasonable.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.