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Does Independent Bank Group Inc’s (NASDAQ:IBTX) PE Ratio Warrant A Sell?

Frank Brewer

Independent Bank Group Inc (NASDAQ:IBTX) trades with a trailing P/E of 22.9x, which is higher than the industry average of 17.1x. While IBTX 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 break down what the P/E ratio is, how to interpret it and what to watch out for. See our latest analysis for Independent Bank Group

What you need to know about the P/E ratio

NasdaqGS:IBTX PE PEG Gauge Apr 30th 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 IBTX

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

IBTX Price-Earnings Ratio = $73.5 ÷ $3.209 = 22.9x

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 IBTX, 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. Since IBTX’s P/E of 22.9x is higher than its industry peers (17.1x), it means that investors are paying more than they should for each dollar of IBTX’s earnings. Therefore, according to this analysis, IBTX is an over-priced stock.

Assumptions to watch out for

However, before you rush out to sell your IBTX 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 IBTX, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with IBTX, then investors would naturally value it at a lower price since it is a riskier investment. The second assumption that must hold true is that the stocks we are comparing IBTX to are fairly valued by the market. If this is violated, IBTX’s P/E may be lower than its peers as they are actually overvalued by investors.

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 IBTX. 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. Future Outlook: What are well-informed industry analysts predicting for IBTX’s future growth? Take a look at our free research report of analyst consensus for IBTX’s outlook.
  2. Past Track Record: Has IBTX 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 IBTX’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.