Does IF Bancorp Inc’s (NASDAQ:IROQ) PE Ratio Warrant A Sell?
IF Bancorp Inc (NASDAQ:IROQ) is trading with a trailing P/E of 43.4x, which is higher than the industry average of 23.2x. While IROQ 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. 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. View our latest analysis for IF Bancorp
Breaking down the P/E ratio
P/E is often used for relative valuation since earnings power is a chief driver of investment value. 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 IROQ
Price-Earnings Ratio = Price per share ÷ Earnings per share
IROQ Price-Earnings Ratio = $20 ÷ $0.461 = 43.4x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful 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 IROQ, 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 IROQ’s P/E of 43.4x is higher than its industry peers (23.2x), it means that investors are paying more than they should for each dollar of IROQ’s earnings. As such, our analysis shows that IROQ represents an over-priced stock.
A few caveats
However, before you rush out to sell your IROQ 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 IROQ, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with IROQ, then its P/E would naturally be lower than its peers, as investors would value those with lower risk at a higher price. The second assumption that must hold true is that the stocks we are comparing IROQ to are fairly valued by the market. If this does not hold true, IROQ’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
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.
