Should You Sell Interactive Brokers Group Inc (NASDAQ:IBKR) At This PE Ratio?
Interactive Brokers Group Inc (NASDAQ:IBKR) is currently trading at a trailing P/E of 63.7x, which is higher than the industry average of 16.9x. 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 Interactive Brokers Group
What you need to know about the P/E ratio
The P/E ratio is a popular ratio used in relative valuation since earnings power is a key 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 IBKR
Price-Earnings Ratio = Price per share ÷ Earnings per share
IBKR Price-Earnings Ratio = $69.23 ÷ $1.087 = 63.7x
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. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to IBKR, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. At 63.7x, IBKR’s P/E is higher than its industry peers (16.9x). This implies that investors are overvaluing each dollar of IBKR’s earnings. Therefore, according to this analysis, IBKR is an over-priced stock.
A few caveats
Before you jump to the conclusion that IBKR should be banished from your portfolio, it is important to realise that our conclusion rests on two assertions. Firstly, our peer group contains companies that are similar to IBKR. 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 IBKR, 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 IBKR to are fairly valued by the market. If this is violated, IBKR’s P/E may be lower than its peers as they are actually overvalued by investors.
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.
