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 United Bancorp Inc (NASDAQ:UBCP).
United Bancorp Inc (NASDAQ:UBCP) trades with a trailing P/E of 17.9x, which is higher than the industry average of 17.1x. While this makes UBCP 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. In this article, 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 United Bancorp
What you need to know about the P/E ratio
P/E is a popular ratio used for relative valuation. 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 UBCP
Price-Earnings Ratio = Price per share ÷ Earnings per share
UBCP Price-Earnings Ratio = $13.9 ÷ $0.779 = 17.9x
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 UBCP, 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. At 17.9x, UBCP’s P/E is higher than its industry peers (17.1x). This implies that investors are overvaluing each dollar of UBCP’s earnings. Therefore, according to this analysis, UBCP is an over-priced stock.
Assumptions to watch out for
Before you jump to the conclusion that UBCP 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 UBCP. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared higher growth firms with UBCP, 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 UBCP to are fairly valued by the market. If this does not hold, there is a possibility that UBCP’s P/E is lower because our peer group is overvalued by the market.
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 UBCP. 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 highly recommend you to complete your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for UBCP’s future growth? Take a look at our free research report of analyst consensus for UBCP’s outlook.
- Past Track Record: Has UBCP 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 UBCP’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.