Is It Time To Buy LillestrømBanken (OB:LSTSB-ME) Based Off Its PE Ratio?

LillestrømBanken (OB:LSTSB-ME) is currently trading at a trailing P/E of 1.7x, which is lower than the industry average of 8.9x. While LSTSB-ME 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. See our latest analysis for LillestrømBanken

Demystifying the P/E ratio

P/E is often used for relative valuation since earnings power is a chief 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.

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 LSTSB-ME, 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. Since it is expected that similar companies have similar P/E ratios, we can come to some conclusions about the stock if the ratios are different.

At 1.7x, LSTSB-ME’s P/E is lower than its industry peers (8.9x). This implies that investors are undervaluing each dollar of LSTSB-ME’s earnings. As such, our analysis shows that LSTSB-ME represents an under-priced stock.

Assumptions to be aware of

While our conclusion might prompt you to buy LSTSB-ME immediately, there are two important assumptions you should be aware of. The first is that our peer group actually contains companies that are similar to LSTSB-ME. If this isn’t the case, the difference in P/E could be due to some other factors. For example, if you accidentally compared higher growth firms with LSTSB-ME, then LSTSB-ME’s P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. Alternatively, if you inadvertently compared less risky firms with LSTSB-ME, LSTSB-ME’s P/E would again be lower since investors would reward its peers’ lower risk with a higher price as well. The second assumption that must hold true is that the stocks we are comparing LSTSB-ME to are fairly valued by the market. If this assumption is violated, LSTSB-ME's P/E may be lower than its peers because its peers are actually overvalued by investors.

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 LSTSB-ME 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. Financial Health: Is LSTSB-ME’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
2. Past Track Record: Has LSTSB-ME 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 LSTSB-ME'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.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.