Does Kirkland’s Inc’s (NASDAQ:KIRK) PE Ratio Signal A Selling Opportunity?
Kirkland’s Inc (NASDAQ:KIRK) trades with a trailing P/E of 29.7x, which is higher than the industry average of 18.4x. Although some investors may jump to the conclusion that you should avoid the stock or sell if you own it, understanding the assumptions behind the P/E ratio might change your mind. Today, I will explain what the P/E ratio is as well as what you should look out for when using it. View our latest analysis for Kirkland’s
Breaking down the Price-Earnings ratio
The P/E ratio is one of many ratios used in relative valuation. 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.
P/E Calculation for KIRK
Price-Earnings Ratio = Price per share ÷ Earnings per share
KIRK Price-Earnings Ratio = $9.84 ÷ $0.332 = 29.7x
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 preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to KIRK, 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 KIRK’s P/E of 29.7x is higher than its industry peers (18.4x), it means that investors are paying more than they should for each dollar of KIRK’s earnings. As such, our analysis shows that KIRK represents an over-priced stock.
Assumptions to be aware of
While our conclusion might prompt you to sell your KIRK shares immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to KIRK, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with KIRK, then its P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing KIRK to are fairly valued by the market. If this does not hold true, KIRK’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
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.
