HomeTrust Bancshares Inc (NASDAQ:HTBI) is currently trading at a trailing P/E of 33.9x, which is higher than the industry average of 17x. 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. 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. See our latest analysis for HomeTrust Bancshares
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 HTBI
Price-Earnings Ratio = Price per share ÷ Earnings per share
HTBI Price-Earnings Ratio = $26 ÷ $0.766 = 33.9x
On its own, the P/E ratio doesn’t tell you much; however, it becomes extremely useful 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. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. At 33.9x, HTBI’s P/E is higher than its industry peers (17x). This implies that investors are overvaluing each dollar of HTBI’s earnings. As such, our analysis shows that HTBI represents an over-priced stock.
Assumptions to watch out for
Before you jump to the conclusion that HTBI should be banished from your portfolio, it is important to realise that our conclusion rests on two assertions. 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 lower risk firms with HTBI, 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 HTBI to are fairly valued by the market. If this does not hold, there is a possibility that HTBI’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.