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Should You Be Tempted To Buy Home Bancorp Inc (NASDAQ:HBCP) Because Of Its PE Ratio?

Austin Wood

Home Bancorp Inc (NASDAQ:HBCP) is trading with a trailing P/E of 18.6x, which is lower than the industry average of 22.7x. 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 deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. See our latest analysis for Home Bancorp

Breaking down the P/E ratio

NasdaqGS:HBCP PE PEG Gauge Apr 23rd 18
NasdaqGS:HBCP PE PEG Gauge Apr 23rd 18

The P/E ratio is one of many ratios used in relative valuation. 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 HBCP

Price-Earnings Ratio = Price per share ÷ Earnings per share

HBCP Price-Earnings Ratio = $43.92 ÷ $2.364 = 18.6x

The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful 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 HBCP, 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. At 18.6x, HBCP’s P/E is lower than its industry peers (22.7x). This implies that investors are undervaluing each dollar of HBCP’s earnings. As such, our analysis shows that HBCP represents an under-priced stock.

A few caveats

However, before you rush out to buy HBCP, 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 HBCP, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with HBCP, 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 HBCP to are fairly valued by the market. If this is violated, HBCP’s P/E may be lower than its peers as they are actually overvalued by investors.

What this means for you:

You may have already conducted fundamental analysis on the stock as a shareholder, so its current undervaluation could signal a good buying opportunity to increase your exposure to HBCP. Now that you understand the ins and outs of the PE metric, you should know to bear in mind its limitations before you make an investment decision. 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 urge you to complete your research by taking a look at the following:

  1. Future Outlook: What are well-informed industry analysts predicting for HBCP’s future growth? Take a look at our free research report of analyst consensus for HBCP’s outlook.

  2. Past Track Record: Has HBCP 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 HBCP’s historicals for more clarity.

  3. 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.