This analysis is intended to introduce important early concepts to people who are starting to invest and want to begin learning the link between Renasant Corporation (NASDAQ:RNST)’s fundamentals and stock market performance.
Renasant Corporation (NASDAQ:RNST) is trading with a trailing P/E of 22.7x, which is higher than the industry average of 17x. Although some investors may jump to the conclusion that you should avoid the stock or sell if you own it, understanding the assumptions behind the P/E ratio might change your mind. Today, I will explain what the P/E ratio is as well as what you should look out for when using it. See our latest analysis for Renasant
What you need to know about the P/E ratio
P/E is a popular ratio used for relative valuation. 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 RNST
Price-Earnings Ratio = Price per share ÷ Earnings per share
RNST Price-Earnings Ratio = $48.22 ÷ $2.12 = 22.7x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to RNST, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. Since RNST’s P/E of 22.7x is higher than its industry peers (17x), it means that investors are paying more than they should for each dollar of RNST’s earnings. Therefore, according to this analysis, RNST is an over-priced stock.
A few caveats
Before you jump to the conclusion that RNST 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 RNST, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with RNST, 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 RNST to are fairly valued by the market. If this does not hold true, RNST’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 rebalance your portfolio and reduce your holdings in RNST. 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:
- Future Outlook: What are well-informed industry analysts predicting for RNST’s future growth? Take a look at our free research report of analyst consensus for RNST’s outlook.
- Past Track Record: Has RNST 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 RNST’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.