FS Bancorp Inc (NASDAQ:FSBW) trades with a trailing P/E of 11.8x, which is lower than the industry average of 22.8x. While FSBW might seem like an attractive stock to buy, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. Today, I will explain what the P/E ratio is as well as what you should look out for when using it. Check out our latest analysis for FS Bancorp
Demystifying the P/E ratio
The P/E ratio is one of many ratios used in 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 FSBW
Price-Earnings Ratio = Price per share ÷ Earnings per share
FSBW Price-Earnings Ratio = $53.5 ÷ $4.551 = 11.8x
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 FSBW, 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. FSBW’s P/E of 11.8x is lower than its industry peers (22.8x), which implies that each dollar of FSBW’s earnings is being undervalued by investors. Therefore, according to this analysis, FSBW is an under-priced stock.
A few caveats
While our conclusion might prompt you to buy FSBW immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to FSBW. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you are comparing lower risk firms with FSBW, then its P/E would naturally be lower than its peers, as investors would value those with lower risk at a higher price. The second assumption that must hold true is that the stocks we are comparing FSBW to are fairly valued by the market. If this is violated, FSBW’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.