United Community Financial Corp (NASDAQ:UCFC) is currently trading at a trailing P/E of 18.5x, which is lower than the industry average of 21.9x. While UCFC 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. In this article, 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 United Community Financial
Breaking down the Price-Earnings ratio
The P/E ratio is one of many ratios used in 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 UCFC
Price-Earnings Ratio = Price per share ÷ Earnings per share
UCFC Price-Earnings Ratio = $10.7 ÷ $0.579 = 18.5x
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. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to UCFC, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use. Since UCFC’s P/E of 18.5x is lower than its industry peers (21.9x), it means that investors are paying less than they should for each dollar of UCFC’s earnings. Therefore, according to this analysis, UCFC is an under-priced stock.
A few caveats
While our conclusion might prompt you to buy UCFC immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to UCFC. 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 UCFC, 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 UCFC to are fairly valued by the market. If this does not hold true, UCFC’s lower P/E ratio may be because firms in our peer group are 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 add more of UCFC to your portfolio. 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 UCFC’s future growth? Take a look at our free research report of analyst consensus for UCFC’s outlook.
- Past Track Record: Has UCFC 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 UCFC’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.