Does The Bank of Princeton’s (BPRN) PE Ratio Warrant A Buy?
The Bank of Princeton (NASDAQ:BPRN) is trading with a trailing P/E of 13.6x, which is lower than the industry average of 17.8x. While BPRN 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. Today, I will break down what the P/E ratio is, how to interpret it and what to watch out for. See our latest analysis for BPRN
Breaking down the Price-Earnings 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 BPRN
Price-Earnings Ratio = Price per share ÷ Earnings per share
BPRN Price-Earnings Ratio = 33.2 ÷ 2.448 = 13.6x
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 BPRN, such as company lifetime and products sold. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. Since BPRN’s P/E of 13.6x is lower than its industry peers (17.8x), it means that investors are paying less than they should for each dollar of BPRN’s earnings. Therefore, according to this analysis, BPRN is an under-priced stock.
A few caveats
While our conclusion might prompt you to buy BPRN immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to BPRN, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with BPRN, 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 BPRN to are fairly valued by the market. If this does not hold true, BPRN’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
What this means for you:
Are you a shareholder? Since you may have already conducted your due diligence on BPRN, 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.
Are you a potential investor? If you are considering investing in BPRN, looking at the PE ratio on its own is not enough to make a well-informed decision. You will benefit from looking at additional analysis and considering its intrinsic valuation along with other relative valuation metrics like PEG and EV/Sales.
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 Bank of Princeton 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.
