Coastway Bancorp Inc (NASDAQ:CWAY) is trading with a trailing P/E of 44.3x, which is higher than the industry average of 21.7x. While this makes CWAY appear like a stock to avoid or sell if you own it, you might change your mind after I explain the assumptions behind the P/E ratio. 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 Coastway Bancorp
Breaking down the P/E ratio
A common ratio used for relative valuation is the P/E ratio. 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 CWAY
Price-Earnings Ratio = Price per share ÷ Earnings per share
CWAY Price-Earnings Ratio = $27.35 ÷ $0.617 = 44.3x
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 CWAY, such as capital structure and profitability. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. CWAY’s P/E of 44.3x is higher than its industry peers (21.7x), which implies that each dollar of CWAY’s earnings is being overvalued by investors. As such, our analysis shows that CWAY represents an over-priced stock.
A few caveats
However, before you rush out to sell your CWAY shares, 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 CWAY, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with CWAY, 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 CWAY to are fairly valued by the market. If this is violated, CWAY’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 rebalance your portfolio and reduce your holdings in CWAY. 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 urge you to complete your research by taking a look at the following:
- Financial Health: Is CWAY’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
- Past Track Record: Has CWAY 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 CWAY’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.