Spirit of Texas Bancshares Inc (NASDAQ:STXB) is trading with a trailing P/E of 23.3x, which is higher than the industry average of 16.9x. While this makes STXB 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 break down what the P/E ratio is, how to interpret it and what to watch out for. Check out our latest analysis for Spirit of Texas Bancshares
Breaking down 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. 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 STXB
Price-Earnings Ratio = Price per share ÷ Earnings per share
STXB Price-Earnings Ratio = $20.86 ÷ $0.895 = 23.3x
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 STXB, such as company lifetime and products sold. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. Since STXB’s P/E of 23.3x is higher than its industry peers (16.9x), it means that investors are paying more than they should for each dollar of STXB’s earnings. As such, our analysis shows that STXB represents an over-priced stock.
Assumptions to watch out for
While our conclusion might prompt you to sell your STXB shares immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to STXB. 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 STXB, 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 STXB to are fairly valued by the market. If this does not hold true, STXB’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
What this means for you:
Since you may have already conducted your due diligence on STXB, the overvaluation of the stock may mean it is a good time to reduce your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I’ve outlined 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 STXB’s future growth? Take a look at our free research report of analyst consensus for STXB’s outlook.
- Financial Health: Is STXB’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.
- 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.