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Is It Time To Sell Capital City Bank Group Inc (CCBG) Based Off Its PE Ratio?

Armando Maloney

Capital City Bank Group Inc (NASDAQ:CCBG) trades with a trailing P/E of 29x, which is higher than the industry average of 16.4x. While CCBG might seem like a stock to avoid or sell if you own it, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. Today, 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 Capital City Bank Group

Demystifying the P/E ratio

NasdaqGS:CCBG PE PEG Gauge Dec 8th 17
NasdaqGS:CCBG PE PEG Gauge Dec 8th 17

P/E is often used for relative valuation since earnings power is a chief 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 CCBG

Price-Earnings Ratio = Price per share ÷ Earnings per share

CCBG Price-Earnings Ratio = $24.28 ÷ $0.837 = 29x

The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to CCBG, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use. Since CCBG’s P/E of 29x is higher than its industry peers (16.4x), it means that investors are paying more than they should for each dollar of CCBG’s earnings. Therefore, according to this analysis, CCBG is an over-priced stock.

Assumptions to be aware of

Before you jump to the conclusion that CCBG 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 CCBG. 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 CCBG, 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 CCBG to are fairly valued by the market. If this does not hold, there is a possibility that CCBG’s P/E is lower because our peer group is overvalued by the market.

What this means for you:

Are you a shareholder? 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 CCBG. 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.

Are you a potential investor? If you are considering investing in CCBG, looking at the PE ratio on its own is not enough to make a well-informed decision. You will benefit from looking at additional analysis and considering its intrinsic valuation along with other relative valuation metrics like PEG and EV/Sales.

PE is one aspect of your portfolio construction to consider when holding or entering into a stock. But it is certainly not the only factor. Take a look at our most recent infographic report on Capital City Bank Group for a more in-depth analysis of the stock to help you make a well-informed investment decision. Since we know a limitation of PE is it doesn’t properly account for growth, you can use our free platform to see my list of stocks with a high growth potential and see if their PE is still reasonable.

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.