First Savings Financial Group Inc (NASDAQ:FSFG) trades with a trailing P/E of 15.7x, 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. Today, I will break down what the P/E ratio is, how to interpret it and what to watch out for. See our latest analysis for First Savings Financial 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 FSFG
Price-Earnings Ratio = Price per share ÷ Earnings per share
FSFG Price-Earnings Ratio = $69 ÷ $4.405 = 15.7x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to FSFG, 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. FSFG’s P/E of 15.7x is lower than its industry peers (16.9x), which implies that each dollar of FSFG’s earnings is being undervalued by investors. Therefore, according to this analysis, FSFG is an under-priced stock.
Assumptions to be aware of
While our conclusion might prompt you to buy FSFG immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to FSFG, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with FSFG, 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 FSFG to are fairly valued by the market. If this is violated, FSFG’s P/E may be lower than its peers as they are actually overvalued by investors.
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 add more of FSFG to your portfolio. 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 FSFG’s future growth? Take a look at our free research report of analyst consensus for FSFG’s outlook.
- Past Track Record: Has FSFG 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 FSFG’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.