Yahoo Finance Should You Be Tempted To Sell Bank of Queensland Limited (ASX:BOQ) At Its Current PE Ratio?
I am writing today to help inform people who are new to the stock market and want to start learning about core concepts of fundamental analysis on practical examples from today’s market.
Bank of Queensland Limited (ASX:BOQ) trades on a trailing P/E of 11.7. This isn’t too far from the industry average (which is 11.6). Although some investors may see this as unappealing, it is important to understand the assumptions behind the P/E ratio before making judgments. In this article, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio.
Check out our latest analysis for Bank of Queensland
Breaking down the Price-Earnings ratio
The P/E ratio is one of many ratios used in 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 BOQ
Price-Earnings Ratio = Price per share ÷ Earnings per share
BOQ Price-Earnings Ratio = A$11.01 ÷ A$0.937 = 11.7x
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 want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as BOQ, such as size and country of operation. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. Bank of Queensland Limited (ASX:BOQ) trades on a trailing P/E of 11.7. This isn’t too far from the industry average (which is 11.6). This multiple is a median of profitable companies of 5 Banks companies in AU including Australia and New Zealand Banking Group, Westpac Banking and Bendigo and Adelaide Bank. You can think of it like this: the market is suggesting that BOQ has similar prospects to its peers in the same industry.
A few caveats
However, it is important to note that our examination of the stock is based on certain assumptions. Firstly, that our peer group contains companies that are similar to BOQ. If this isn’t the case, the difference in P/E could be due to other factors. For example, Bank of Queensland Limited could be growing more quickly than the companies we’re comparing it with. In that case it would deserve a higher P/E ratio. We should also be aware that the stocks we are comparing to BOQ may not be fairly valued. So while we can reasonably surmise that it is optimistically valued relative to a peer group, it might be fairly valued, if the peer group is undervalued.
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 BOQ. 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 highly recommend you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for BOQ’s future growth? Take a look at our free research report of analyst consensus for BOQ’s outlook.
Past Track Record: Has BOQ 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 BOQ’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 past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
