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# Does Washington Trust Bancorp Inc’s (NASDAQ:WASH) PE Ratio Signal A Buying Opportunity?

This analysis is intended to introduce important early concepts to people who are starting to invest and want to start learning about core concepts of fundamental analysis on practical examples from today’s market.

Washington Trust Bancorp Inc (NASDAQ:WASH) is currently trading at a trailing P/E of 18.1, which is close to the industry average of 18.2. 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 deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio.

### Demystifying the P/E ratio

The P/E ratio is one of many ratios used in 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 WASH

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

WASH Price-Earnings Ratio = \$57.55 ÷ \$3.174 = 18.1x

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 WASH, 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. Washington Trust Bancorp Inc (NASDAQ:WASH) is currently trading at a trailing P/E of 18.1, which is close to the industry average of 18.2. 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. One could put it like this: the market is pricing WASH as if it is roughly average for its industry.

### A few caveats

Before you jump to conclusions it is important to realise that our assumptions rests on two assertions. Firstly, our peer group contains companies that are similar to WASH. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you are comparing lower risk firms with WASH, then its P/E would naturally be lower than its peers, as investors would value those with lower risk at a higher price. The second assumption that must hold true is that the stocks we are comparing WASH to are fairly valued by the market. If this does not hold true, WASH’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 add more of WASH to your portfolio. 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 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 WASH’s future growth? Take a look at our free research report of analyst consensus for WASH’s outlook.
2. Past Track Record: Has WASH 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 WASH’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.