U.S. Markets closed
  • S&P 500

    -27.29 (-0.72%)
  • Dow 30

    -177.24 (-0.57%)
  • Nasdaq

    -114.10 (-0.87%)
  • Russell 2000

    -32.15 (-1.49%)
  • Crude Oil

    -0.39 (-0.74%)
  • Gold

    -2.90 (-0.16%)
  • Silver

    +0.01 (+0.06%)

    +0.0001 (+0.0121%)
  • 10-Yr Bond

    -0.0320 (-2.83%)
  • Vix

    +1.09 (+4.69%)

    +0.0003 (+0.0190%)

    -0.1000 (-0.0963%)

    +143.54 (+0.40%)
  • CMC Crypto 200

    -36.43 (-4.96%)
  • FTSE 100

    -66.25 (-0.97%)
  • Nikkei 225

    -224.63 (-0.79%)

Does Eagle Bancorp Montana Inc’s (NASDAQ:EBMT) PE Ratio Signal A Buying Opportunity?

Alexis Guardo

Eagle Bancorp Montana Inc (NASDAQ:EBMT) is currently trading at a trailing P/E of 16.1x, which is lower than the industry average of 17x. Although some investors may jump to the conclusion that this is a great buying opportunity, understanding the assumptions behind the P/E ratio might change your mind. Today, I will break down what the P/E ratio is, how to interpret it and what to watch out for. Check out our latest analysis for Eagle Bancorp Montana

Demystifying the P/E ratio

NasdaqGM:EBMT PE PEG Gauge Jan 24th 18
NasdaqGM:EBMT PE PEG Gauge Jan 24th 18

The P/E ratio is a popular ratio used in relative valuation since earnings power is a key 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 EBMT

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

EBMT Price-Earnings Ratio = $21.19 ÷ $1.313 = 16.1x

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 want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as EBMT, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use. At 16.1x, EBMT’s P/E is lower than its industry peers (17x). This implies that investors are undervaluing each dollar of EBMT’s earnings. As such, our analysis shows that EBMT represents an under-priced stock.

Assumptions to be aware of

However, before you rush out to buy EBMT, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to EBMT. 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 EBMT, 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 EBMT to are fairly valued by the market. If this is violated, EBMT’s P/E may be lower than its peers as they are actually overvalued by investors.

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.