This article is intended for those of you who are at the beginning of your investing journey and want to better understand how you can grow your money by investing in Citizens Community Bancorp Inc (NASDAQ:CZWI).
Citizens Community Bancorp Inc (NASDAQ:CZWI) is currently trading at a trailing P/E of 23.6x, which is higher than the industry average of 22.6x. While CZWI 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. See our latest analysis for Citizens Community Bancorp
What you need to know about 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 CZWI
Price-Earnings Ratio = Price per share ÷ Earnings per share
CZWI Price-Earnings Ratio = $13.75 ÷ $0.583 = 23.6x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to CZWI, 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. CZWI’s P/E of 23.6x is higher than its industry peers (22.6x), which implies that each dollar of CZWI’s earnings is being overvalued by investors. Therefore, according to this analysis, CZWI is an over-priced stock.
A few caveats
While our conclusion might prompt you to sell your CZWI shares immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to CZWI, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with CZWI, 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 CZWI to are fairly valued by the market. If this does not hold, there is a possibility that CZWI’s P/E is lower because our peer group is 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 CZWI. 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 highly recommend you to complete your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for CZWI’s future growth? Take a look at our free research report of analyst consensus for CZWI’s outlook.
- Past Track Record: Has CZWI 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 CZWI’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.