Civista Bancshares Inc (NASDAQ:CIVB) trades with a trailing P/E of 14.4x, which is lower than the industry average of 18.6x. While CIVB might seem like an attractive stock to buy, 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. View our latest analysis for Civista Bancshares
Demystifying the P/E ratio
A common ratio used for relative valuation is the P/E ratio. 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 CIVB
Price-Earnings Ratio = Price per share ÷ Earnings per share
CIVB Price-Earnings Ratio = 22.95 ÷ 1.596 = 14.4x
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 CIVB, such as capital structure and profitability. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. CIVB’s P/E of 14.4x is lower than its industry peers (18.6x), which implies that each dollar of CIVB’s earnings is being undervalued by investors. As such, our analysis shows that CIVB represents an under-priced stock.
A few caveats
Before you jump to the conclusion that CIVB is the perfect buying opportunity, it is important to realise that our conclusion rests on two assertions. The first is that our “similar companies” are actually similar to CIVB, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with CIVB, then investors would naturally value it at a lower price since it is a riskier investment. The second assumption that must hold true is that the stocks we are comparing CIVB to are fairly valued by the market. If this is violated, CIVB's P/E may be lower than its peers as they are actually overvalued by investors.
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 undervaluation could signal a good buying opportunity to increase your exposure to CIVB. 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 CIVB has been on your watch list for a while, it is best you also consider its intrinsic valuation. Looking at PE on its own will not give you the full picture of the stock as an investment, so I suggest you should also look at other relative valuation metrics like EV/EBITDA or PEG.