United Bankshares Inc (NASDAQ:UBSI) trades with a trailing P/E of 23.5x, which is higher than the industry average of 17.4x. While this makes UBSI 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 explain what the P/E ratio is as well as what you should look out for when using it. Check out our latest analysis for United Bankshares
What you need to know about the P/E ratio
A common ratio used for relative valuation is the P/E ratio. 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 UBSI
Price-Earnings Ratio = Price per share ÷ Earnings per share
UBSI Price-Earnings Ratio = $36.3 ÷ $1.544 = 23.5x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to UBSI, such as capital structure and profitability. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. UBSI’s P/E of 23.5x is higher than its industry peers (17.4x), which implies that each dollar of UBSI’s earnings is being overvalued by investors. As such, our analysis shows that UBSI represents an over-priced stock.
A few caveats
However, before you rush out to sell your UBSI shares, it is important to note that this conclusion is based on two key assumptions. The first is that our “similar companies” are actually similar to UBSI, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with UBSI, 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 UBSI to are fairly valued by the market. If this does not hold, there is a possibility that UBSI’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.