The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want to better understand how you can grow your money by investing in Riverview Bancorp Inc (NASDAQ:RVSB).
Riverview Bancorp Inc (NASDAQ:RVSB) is trading with a trailing P/E of 19.4x, which is lower than the industry average of 22.4x. 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 break down what the P/E ratio is, how to interpret it and what to watch out for. View out our latest analysis for Riverview Bancorp
Breaking down the P/E ratio
P/E is a popular ratio used for 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 RVSB
Price-Earnings Ratio = Price per share ÷ Earnings per share
RVSB Price-Earnings Ratio = $8.83 ÷ $0.455 = 19.4x
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 preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to RVSB, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use. Since RVSB’s P/E of 19.4x is lower than its industry peers (22.4x), it means that investors are paying less than they should for each dollar of RVSB’s earnings. Therefore, according to this analysis, RVSB is an under-priced stock.
A few caveats
However, before you rush out to buy RVSB, 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 RVSB, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with RVSB, 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 RVSB to are fairly valued by the market. If this is violated, RVSB’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 RVSB. 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 highly recommend you to complete your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for RVSB’s future growth? Take a look at our free research report of analyst consensus for RVSB’s outlook.
- Past Track Record: Has RVSB 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 RVSB’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.