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# At \$45.55, Is Hooker Furniture Corporation (HOFT) A Buy?

Hooker Furniture Corporation (NASDAQ:HOFT) trades with a trailing P/E of 17.6x, which is lower than the industry average of 21.2x. While HOFT 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 break down what the P/E ratio is, how to interpret it and what to watch out for. See our latest analysis for HOFT

### Demystifying the P/E ratio

A common ratio used for relative valuation is the P/E ratio. By comparing a stockâ€™s price per share to its earnings per share, we are able to see how much investors are paying for each dollar of the companyâ€™s earnings.

Formula

Price-Earnings Ratio = Price per share Ã· Earnings per share

P/E Calculation for HOFT

Price per share = 45.55

Earnings per share = 2.588

âˆ´ Price-Earnings Ratio = 45.55 Ã· 2.588 = 17.6x

The P/E ratio itself doesnâ€™t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. Ideally, we want to compare the stockâ€™s P/E ratio to the average of companies that have similar characteristics as HOFT, 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 similar companies should technically have similar P/E ratios, we can very quickly come to some conclusions about the stock if the ratios differ.

At 17.6x, HOFTâ€™s P/E is lower than its industry peers (21.2x). This implies that investors are undervaluing each dollar of HOFTâ€™s earnings. As such, our analysis shows that HOFT represents an under-priced stock.

### Assumptions to be aware of

Before you jump to the conclusion that HOFT represents the perfect buying opportunity, it is important to realise that our conclusion rests on two important assertions. The first is that our peer group actually contains companies that are similar to HOFT. If this isnâ€™t the case, the difference in P/E could be due to some other factors. For example, if you are inadvertently comparing lower risk firms with HOFT, then HOFTâ€™s P/E would naturally be lower than its peers, since investors would value those with lower risk with a higher price. The other possibility is if you were accidentally comparing higher growth firms with HOFT. In this case, HOFTâ€™s P/E would be lower since investors would also reward its peersâ€™ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing HOFT to are fairly valued by the market. If this assumption does not hold true, HOFTâ€™s lower P/E ratio may be because firms in our peer group are being overvalued by the market.

### What this means for you:

Are you a shareholder? You may have already conducted fundamental analysis on the stock as a shareholder, so its current undervaluation could signal a good buying opportunity to increase your exposure to HOFT. 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.

Are you a potential investor? If you are considering investing in HOFT, basing your decision on the PE metric at one point in time is certainly not sufficient. I recommend you do additional analysis by looking at its intrinsic valuation and using other relative valuation ratios like PEG or EV/EBITDA.

PE is one aspect of your portfolio construction to consider when holding or entering into a stock. But it is certainly not the only factor. Take a look at our most recent infographic report on Hooker Furniture for a more in-depth analysis of the stock to help you make a well-informed investment decision. Since we know a limitation of PE is it doesn't properly account for growth, you can use our free platform to see my list of stocks with a high growth potential and see if their PE is still reasonable.

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.