Community Trust Bancorp Inc (NASDAQ:CTBI) trades with a trailing P/E of 16.2x, which is lower than the industry average of 16.9x. Although some investors may jump to the conclusion that this is a great buying opportunity, understanding the assumptions behind the P/E ratio might change your mind. In this article, 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 Community Trust Bancorp
What you need to know about the P/E ratio
P/E is often used for relative valuation since earnings power is a chief 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 CTBI
Price-Earnings Ratio = Price per share ÷ Earnings per share
CTBI Price-Earnings Ratio = $47.45 ÷ $2.921 = 16.2x
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 want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as CTBI, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use. CTBI’s P/E of 16.2x is lower than its industry peers (16.9x), which implies that each dollar of CTBI’s earnings is being undervalued by investors. Therefore, according to this analysis, CTBI is an under-priced stock.
A few caveats
While our conclusion might prompt you to buy CTBI immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to CTBI. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared lower risk firms with CTBI, then investors would naturally value it at a lower price since it is a riskier investment. The second assumption that must hold true is that the stocks we are comparing CTBI to are fairly valued by the market. If this does not hold, there is a possibility that CTBI’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.