Is PB Bancorp Inc’s (NASDAQ:PBBI) PE Ratio A Signal To Sell For Investors?
PB Bancorp Inc (NASDAQ:PBBI) trades with a trailing P/E of 26.4x, which is higher than the industry average of 22.1x. While this makes PBBI 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. See our latest analysis for PB Bancorp
Breaking down the Price-Earnings ratio
P/E is often used for relative valuation since earnings power is a chief driver of investment value. 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 PBBI
Price-Earnings Ratio = Price per share ÷ Earnings per share
PBBI Price-Earnings Ratio = $10.63 ÷ $0.403 = 26.4x
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 preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to PBBI, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use. PBBI’s P/E of 26.4x is higher than its industry peers (22.1x), which implies that each dollar of PBBI’s earnings is being overvalued by investors. As such, our analysis shows that PBBI represents an over-priced stock.
Assumptions to watch out for
Before you jump to the conclusion that PBBI 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 PBBI, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with PBBI, 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 PBBI to are fairly valued by the market. If this does not hold, there is a possibility that PBBI’s P/E is lower because our peer group is 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 PBBI. 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:
Financial Health: Is PBBI’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
Past Track Record: Has PBBI 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 PBBI’s historicals for more clarity.
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.
