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Does HomeTrust Bancshares Inc’s (NASDAQ:HTBI) PE Ratio Signal A Selling Opportunity?

Daisy Mock

I am writing today to help inform people who are new to the stock market and want to begin learning about how to value company based on its current earnings and what are the drawbacks of this method.

HomeTrust Bancshares Inc (NASDAQ:HTBI) is trading with a trailing P/E of 65x, which is higher than the industry average of 16.3x. While this makes HTBI 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. Today, 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 HomeTrust Bancshares

Breaking down the P/E ratio

NasdaqGS:HTBI PE PEG Gauge August 21st 18

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

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

HTBI Price-Earnings Ratio = $29.7 ÷ $0.457 = 65x

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 want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as HTBI, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use. HTBI’s P/E of 65x is higher than its industry peers (16.3x), which implies that each dollar of HTBI’s earnings is being overvalued by investors. This multiple is a median of profitable companies of 25 Banks companies in US including Great Basin Financial, Mercantil Servicios Financieros C.A and CIB Marine Bancshares. Therefore, according to this analysis, HTBI is an over-priced stock.

A few caveats

While our conclusion might prompt you to sell your HTBI shares immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to HTBI, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with HTBI, 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 HTBI to are fairly valued by the market. If this does not hold true, HTBI’s lower P/E ratio may be because firms in our peer group are overvalued by the market.

What this means for you:

If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to rebalance your portfolio and reduce your holdings in HTBI. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned above. 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 urge you to complete your research by taking a look at the following:

  1. Future Outlook: What are well-informed industry analysts predicting for HTBI’s future growth? Take a look at our free research report of analyst consensus for HTBI’s outlook.
  2. Past Track Record: Has HTBI 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 HTBI’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 past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.