Should You Sell Easterly Government Properties Inc (NYSE:DEA) At This PE Ratio?
Easterly Government Properties Inc (NYSE:DEA) is currently trading at a trailing P/E of 198.6x, which is higher than the industry average of 22.7x. 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. In this article, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. View our latest analysis for Easterly Government Properties
Demystifying the P/E ratio
A common ratio used for relative valuation is the P/E ratio. 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 DEA
Price-Earnings Ratio = Price per share ÷ Earnings per share
DEA Price-Earnings Ratio = $19.74 ÷ $0.099 = 198.6x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to DEA, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use. DEA’s P/E of 198.6x is higher than its industry peers (22.7x), which implies that each dollar of DEA’s earnings is being overvalued by investors. Therefore, according to this analysis, DEA is an over-priced stock.
Assumptions to be aware of
Before you jump to the conclusion that DEA should be banished from your portfolio, it is important to realise that our conclusion rests on two assertions. Firstly, our peer group contains companies that are similar to DEA. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared higher growth firms with DEA, 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 DEA to are fairly valued by the market. If this is violated, DEA’s P/E may be lower than its peers as they are actually overvalued by investors.
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.
