Should You Buy Great Southern Bancorp Inc (NASDAQ:GSBC) At This PE Ratio?
Great Southern Bancorp Inc (NASDAQ:GSBC) is currently trading at a trailing P/E of 14x, which is lower than the industry average of 17.5x. While GSBC might seem like an attractive stock to buy, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. In this article, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. See our latest analysis for Great Southern Bancorp
Breaking down the Price-Earnings ratio
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 GSBC
Price-Earnings Ratio = Price per share ÷ Earnings per share
GSBC Price-Earnings Ratio = $51.35 ÷ $3.675 = 14x
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. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to GSBC, such as company lifetime and products sold. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. Since GSBC’s P/E of 14x is lower than its industry peers (17.5x), it means that investors are paying less than they should for each dollar of GSBC’s earnings. As such, our analysis shows that GSBC represents an under-priced stock.
Assumptions to be aware of
However, before you rush out to buy GSBC, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to GSBC. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared higher growth firms with GSBC, 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 GSBC to are fairly valued by the market. If this does not hold, there is a possibility that GSBC’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
Since you may have already conducted your due diligence on GSBC, the undervaluation of the stock may mean it is a good time to top up on your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I’ve outlined above. 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 highly recommend you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for GSBC’s future growth? Take a look at our free research report of analyst consensus for GSBC’s outlook.
Past Track Record: Has GSBC 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 GSBC’s historicals for more clarity.
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 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.
