Does TrustCo Bank Corp NY’s (NASDAQ:TRST) PE Ratio Signal A Buying Opportunity?

Simply Wall St. - finance.yahoo.com Posted 6 years ago
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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 learn about the link between company’s fundamentals and stock market performance.

TrustCo Bank Corp NY (NASDAQ:TRST) is currently trading at a trailing P/E of 15.9x, which is lower than the industry average of 19.7x. While TRST 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. Today, I will break down what the P/E ratio is, how to interpret it and what to watch out for.

Check out our latest analysis for TrustCo Bank Corp NY

Demystifying the P/E ratio

NasdaqGS:TRST PE PEG Gauge October 3rd 18
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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 TRST

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

TRST Price-Earnings Ratio = $8.26 ÷ $0.521 = 15.9x

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 TRST, 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. Since TRST’s P/E of 15.9 is lower than its industry peers (19.7), it means that investors are paying less for each dollar of TRST’s earnings. This multiple is a median of profitable companies of 25 Mortgage companies in US including Security National Financial, PennyMac Financial Services and MMA Capital Management. One could put it like this: the market is pricing TRST as if it is a weaker company than the average company in its industry.

Assumptions to watch out for

However, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to TRST. 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 TRST, 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 TRST to are fairly valued by the market. If this does not hold, there is a possibility that TRST’s P/E is lower because our peer group is overvalued by the market.

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 add more of TRST to your portfolio. 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 highly recommend you to complete your research by taking a look at the following:

  1. Future Outlook: What are well-informed industry analysts predicting for TRST’s future growth? Take a look at our free research report of analyst consensus for TRST’s outlook.
  2. Past Track Record: Has TRST 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 TRST’s historicals for more clarity.
  3. 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 [email protected].