Columbia Banking System Inc (NASDAQ:COLB) is trading with a trailing P/E of 23.3x, which is higher than the industry average of 17.5x. While this makes COLB 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 break down what the P/E ratio is, how to interpret it and what to watch out for. Check out our latest analysis for Columbia Banking System
Demystifying the P/E ratio
P/E is a popular ratio used for 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 COLB
Price-Earnings Ratio = Price per share ÷ Earnings per share
COLB Price-Earnings Ratio = $43.23 ÷ $1.859 = 23.3x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to COLB, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. COLB’s P/E of 23.3x is higher than its industry peers (17.5x), which implies that each dollar of COLB’s earnings is being overvalued by investors. Therefore, according to this analysis, COLB is an over-priced stock.
A few caveats
However, before you rush out to sell your COLB shares, it is important to note that this conclusion is based on two key assumptions. The first is that our “similar companies” are actually similar to COLB, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with COLB, 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 COLB to are fairly valued by the market. If this does not hold true, COLB’s lower P/E ratio may be because firms in our peer group are 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 COLB. 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 urge you to complete your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for COLB’s future growth? Take a look at our free research report of analyst consensus for COLB’s outlook.
- Past Track Record: Has COLB 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 COLB’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.