It hasn't been a great afternoon session for Sumitomo Mitsui Financial investors, who have watched their shares sink by -1.8% to a price of $8.18. Some of you might be wondering if it's time to buy the dip. If you are considering this, make sure to check the company's fundamentals first to determine if the shares are fairly valued at today's prices.
Sumitomo Mitsui Financial Group, Inc., together with its subsidiaries, provides banking, leasing, securities, credit card, and consumer finance services. The company belongs to the Finance sector, which has an average price to earnings (P/E) ratio of 14.34. In contrast, Sumitomo Mitsui Financial has a trailing 12 month P/E ratio of 9.7 based on its earnings per share of $0.84.
There is an important limit on the usefulness of P/E ratios. Since the P/E ratio is the share price divided by earnings per share, the ratio is determined partially by market sentiment on the stock. Sometimes a negative sentiment translates to a lower market price and therefore a lower P/E ratio -- and there might be good reasons for this negative sentiment.
One of the main reasons not to blindly invest in a company with a low P/E ratio is that it might have low growth expectations. Low growth correlates with low stock performance, so it's useful to factor growth into the valuation process. One of the easiest ways to do this is to divide the company's P/E ratio by its expected growth rate, which results in the price to earnings growth, or PEG ratio.
