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# Does First Guaranty Bancshares Inc’s (NASDAQ:FGBI) PE Ratio Signal A Selling Opportunity?

This analysis is intended to introduce important early concepts to people who are starting to invest and want to better understand how you can grow your money by investing in First Guaranty Bancshares Inc (NASDAQ:FGBI).

First Guaranty Bancshares Inc (NASDAQ:FGBI) trades with a trailing P/E of 19.6x, which is higher than the industry average of 17.1x. While this makes FGBI appear like a stock to avoid or sell if you own it, you might change your mind after I explain the assumptions behind the P/E ratio. 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.

### 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. 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 FGBI

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

FGBI Price-Earnings Ratio = \$27.22 ÷ \$1.388 = 19.6x

The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to FGBI, 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. FGBI’s P/E of 19.6x is higher than its industry peers (17.1x), which implies that each dollar of FGBI’s earnings is being overvalued by investors. Therefore, according to this analysis, FGBI is an over-priced stock.

### Assumptions to watch out for

However, before you rush out to sell your FGBI 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 FGBI, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with FGBI, 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 FGBI to are fairly valued by the market. If this does not hold true, FGBI’s lower P/E ratio may be because firms in our peer group are 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 FGBI. 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:

1. Financial Health: Is FGBI’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
2. Past Track Record: Has FGBI 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 FGBI’s historicals for more clarity.
3. 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.