BancFirst Corporation (NASDAQ:BANF) is currently trading at a trailing P/E of 21x, which is higher than the industry average of 17.7x. While BANF 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 break down what the P/E ratio is, how to interpret it and what to watch out for. See our latest analysis for BancFirst

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. 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 BANF

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

BANF Price-Earnings Ratio = $57.05 ÷ $2.717 = 21x

The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to BANF, such as company lifetime and products sold. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. BANF’s P/E of 21x is higher than its industry peers (17.7x), which implies that each dollar of BANF’s earnings is being overvalued by investors. Therefore, according to this analysis, BANF is an over-priced stock.

Assumptions to watch out for

While our conclusion might prompt you to sell your BANF shares immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to BANF, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with BANF, 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 BANF to are fairly valued by the market. If this does not hold, there is a possibility that BANF’s P/E is lower because our peer group is 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.