Riverview Bancorp Inc (NASDAQ:RVSB) trades with a trailing P/E of 21.6x, which is higher than the industry average of 20.1x. While RVSB 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. Today, 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 Riverview Bancorp
Breaking down the Price-Earnings ratio
P/E is a popular ratio used for relative valuation. 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 RVSB
Price-Earnings Ratio = Price per share ÷ Earnings per share
RVSB Price-Earnings Ratio = $9.35 ÷ $0.433 = 21.6x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to RVSB, such as company lifetime and products sold. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. At 21.6x, RVSB’s P/E is higher than its industry peers (20.1x). This implies that investors are overvaluing each dollar of RVSB’s earnings. As such, our analysis shows that RVSB represents an over-priced stock.
Assumptions to be aware of
However, before you rush out to sell your RVSB 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 RVSB, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with RVSB, 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 RVSB to are fairly valued by the market. If this does not hold, there is a possibility that RVSB’s P/E is lower because our peer group is overvalued by the market.
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.