Byline Bancorp Inc (NYSE:BY) is currently trading at a trailing P/E of 59.7x, which is higher than the industry average of 17.4x. While BY 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. In this article, I will explain what the P/E ratio is as well as what you should look out for when using it. See our latest analysis for Byline Bancorp

What you need to know about 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 BY

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

BY Price-Earnings Ratio = $23.05 ÷ $0.386 = 59.7x

The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to BY, 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. Since BY’s P/E of 59.7x is higher than its industry peers (17.4x), it means that investors are paying more than they should for each dollar of BY’s earnings. Therefore, according to this analysis, BY is an over-priced stock.

Assumptions to be aware of

Before you jump to the conclusion that BY 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 BY, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with BY, 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 BY to are fairly valued by the market. If this does not hold true, BY’s lower P/E ratio may be because firms in our peer group are overvalued by the market.

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.