Should You Be Tempted To Buy LCNB Corp (NASDAQ:LCNB) At Its Current PE Ratio?
LCNB Corp (NASDAQ:LCNB) trades with a trailing P/E of 15.1x, which is lower than the industry average of 17.8x. While this makes LCNB appear like a great stock to buy, you might change your mind after I explain the assumptions behind the P/E ratio. Today, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. Check out our latest analysis for LCNB
Breaking down the Price-Earnings 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 LCNB
Price-Earnings Ratio = Price per share ÷ Earnings per share
LCNB Price-Earnings Ratio = $19.55 ÷ $1.296 = 15.1x
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 LCNB, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. LCNB’s P/E of 15.1x is lower than its industry peers (17.8x), which implies that each dollar of LCNB’s earnings is being undervalued by investors. Therefore, according to this analysis, LCNB is an under-priced stock.
Assumptions to watch out for
However, before you rush out to buy LCNB, 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 LCNB, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with LCNB, 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 LCNB to are fairly valued by the market. If this does not hold true, LCNB’s lower P/E ratio may be because firms in our peer group are 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.
