The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want to better understand how you can grow your money by investing in Midland States Bancorp Inc (NASDAQ:MSBI).
Midland States Bancorp Inc (NASDAQ:MSBI) trades with a trailing P/E of 74.1x, which is higher than the industry average of 17x. Although some investors may jump to the conclusion that you should avoid the stock or sell if you own it, understanding the assumptions behind the P/E ratio might change your mind. Today, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. See our latest analysis for Midland States Bancorp
Demystifying the P/E ratio
A common ratio used for relative valuation is the P/E ratio. 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 MSBI
Price-Earnings Ratio = Price per share ÷ Earnings per share
MSBI Price-Earnings Ratio = $35.65 ÷ $0.481 = 74.1x
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 MSBI, such as capital structure and profitability. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. At 74.1x, MSBI’s P/E is higher than its industry peers (17x). This implies that investors are overvaluing each dollar of MSBI’s earnings. As such, our analysis shows that MSBI represents an over-priced stock.
Assumptions to be aware of
However, before you rush out to sell your MSBI shares, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to MSBI. 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 MSBI, 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 MSBI to are fairly valued by the market. If this is violated, MSBI’s P/E may be lower than its peers as they are actually overvalued by investors.
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 rebalance your portfolio and reduce your holdings in MSBI. 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 urge you to complete your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for MSBI’s future growth? Take a look at our free research report of analyst consensus for MSBI’s outlook.
- Past Track Record: Has MSBI 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 MSBI’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.