BankFinancial Corporation (NASDAQ:BFIN) trades with a trailing P/E of 29.7x, which is higher than the industry average of 21.9x. While this makes BFIN 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. View our latest analysis for BankFinancial
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. 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 BFIN
Price-Earnings Ratio = Price per share ÷ Earnings per share
BFIN Price-Earnings Ratio = $17.52 ÷ $0.59 = 29.7x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful 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 BFIN, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. At 29.7x, BFIN’s P/E is higher than its industry peers (21.9x). This implies that investors are overvaluing each dollar of BFIN’s earnings. Therefore, according to this analysis, BFIN is an over-priced stock.
A few caveats
Before you jump to the conclusion that BFIN should be banished from your portfolio, it is important to realise that our conclusion rests on two assertions. The first is that our “similar companies” are actually similar to BFIN, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with BFIN, 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 BFIN to are fairly valued by the market. If this does not hold, there is a possibility that BFIN’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
You may have already conducted fundamental analysis on the stock as a shareholder, so its current overvaluation could signal a potential selling opportunity to reduce your exposure to BFIN. Now that you understand the ins and outs of the PE metric, you should know to bear in mind its limitations before you make an investment decision. 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 BFIN’s future growth? Take a look at our free research report of analyst consensus for BFIN’s outlook.
- Past Track Record: Has BFIN 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 BFIN’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.