QCR Holdings Inc (NASDAQ:QCRH) trades with a trailing P/E of 16.5x, which is lower than the industry average of 17.5x. 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 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 QCR Holdings
Breaking down the P/E ratio
P/E is often used for relative valuation since earnings power is a chief driver of investment value. 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 QCRH
Price-Earnings Ratio = Price per share ÷ Earnings per share
QCRH Price-Earnings Ratio = $44.3 ÷ $2.68 = 16.5x
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 QCRH, such as company lifetime and products sold. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. QCRH’s P/E of 16.5x is lower than its industry peers (17.5x), which implies that each dollar of QCRH’s earnings is being undervalued by investors. As such, our analysis shows that QCRH represents an under-priced stock.
Assumptions to watch out for
While our conclusion might prompt you to buy QCRH immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to QCRH, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with QCRH, 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 QCRH to are fairly valued by the market. If this does not hold true, QCRH’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
What this means for you:
Since you may have already conducted your due diligence on QCRH, the undervaluation of the stock may mean it is a good time to top up on your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I’ve outlined 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 QCRH’s future growth? Take a look at our free research report of analyst consensus for QCRH’s outlook.
- Past Track Record: Has QCRH 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 QCRH’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.