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Is American River Bankshares (NASDAQ:AMRB) Attractive At This PE Ratio?

Dane Simmons

This analysis is intended to introduce important early concepts to people who are starting to invest and want to start learning about core concepts of fundamental analysis on practical examples from today’s market.

American River Bankshares (NASDAQ:AMRB) trades with a trailing P/E of 28.3x, which is higher than the industry average of 16.4x. Although some investors may jump to the conclusion that you should avoid the stock or sell if you own it, understanding the assumptions behind the P/E ratio might change your mind. In this article, 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 American River Bankshares

Demystifying the P/E ratio

NasdaqGS:AMRB PE PEG Gauge August 22nd 18
NasdaqGS:AMRB PE PEG Gauge August 22nd 18

The P/E ratio is one of many ratios used in relative valuation. By comparing a stock’s price per share to its earnings per share, we are able to see how much investors are paying for each dollar of the company’s earnings.

P/E Calculation for AMRB

Price-Earnings Ratio = Price per share ÷ Earnings per share

AMRB Price-Earnings Ratio = $15.55 ÷ $0.549 = 28.3x

On its own, the P/E ratio doesn’t tell you much; however, it becomes extremely useful 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 AMRB, such as capital structure and profitability. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. AMRB’s P/E of 28.3x is higher than its industry peers (16.4x), which implies that each dollar of AMRB’s earnings is being overvalued by investors. This multiple is a median of profitable companies of 25 Banks companies in US including Great Basin Financial, Mercantil Servicios Financieros C.A and CIB Marine Bancshares. As such, our analysis shows that AMRB represents an over-priced stock.

Assumptions to watch out for

However, before you rush out to sell your AMRB 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 AMRB, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with AMRB, then investors would naturally value it at a lower price since it is a riskier investment. The second assumption that must hold true is that the stocks we are comparing AMRB to are fairly valued by the market. If this does not hold true, AMRB’s lower P/E ratio may be because firms in our peer group are overvalued by the market.

What this means for you:

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 AMRB. 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. Remember that basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PE ratio is very one-dimensional. If you have not done so already, I urge you to complete your research by taking a look at the following:

  1. Future Outlook: What are well-informed industry analysts predicting for AMRB’s future growth? Take a look at our free research report of analyst consensus for AMRB’s outlook.

  2. Past Track Record: Has AMRB been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of AMRB’s historicals for more clarity.

  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.