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Should You Be Tempted To Sell Southside Bancshares Inc (NASDAQ:SBSI) Because Of Its PE Ratio?

Southside Bancshares Inc (NASDAQ:SBSI) trades with a trailing P/E of 19x, which is higher than the industry average of 17.4x. While SBSI might seem like a stock to avoid or sell if you own it, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. Today, I will break down what the P/E ratio is, how to interpret it and what to watch out for. View our latest analysis for Southside Bancshares

Demystifying 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 stockâ€™s price per share to the stockâ€™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 companyâ€™s earnings.

P/E Calculation for SBSI

Price-Earnings Ratio = Price per share Ã· Earnings per share

SBSI Price-Earnings Ratio = \$34.5 Ã· \$1.82 = 19x

The P/E ratio itself doesnâ€™t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. Our goal is to compare the stockâ€™s P/E ratio to the average of companies that have similar attributes to SBSI, such as company lifetime and products sold. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. Since SBSIâ€™s P/E of 19x is higher than its industry peers (17.4x), it means that investors are paying more than they should for each dollar of SBSIâ€™s earnings. As such, our analysis shows that SBSI represents an over-priced stock.

A few caveats

Before you jump to the conclusion that SBSI should be banished from your portfolio, it is important to realise that our conclusion rests on two assertions. Firstly, our peer group contains companies that are similar to SBSI. If this isnâ€™t the case, the difference in P/E could be due to other factors. For example, if you compared higher growth firms with SBSI, then its P/E would naturally be lower since investors would reward its peersâ€™ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing SBSI to are fairly valued by the market. If this is violated, SBSIâ€™s P/E may be lower than its peers as they are actually overvalued by investors.

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.