Should You Be Tempted To Sell Carrols Restaurant Group Inc (NASDAQ:TAST) Because Of Its PE Ratio?
Carrols Restaurant Group Inc (NASDAQ:TAST) is trading with a trailing P/E of 70.4x, which is higher than the industry average of 22.2x. While this makes TAST appear like a stock to avoid or sell if you own it, you might change your mind after I explain the assumptions behind the P/E ratio. 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. Check out our latest analysis for Carrols Restaurant Group
What you need to know about the P/E ratio
The P/E ratio is a popular ratio used in relative valuation since earnings power is a key 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.
P/E Calculation for TAST
Price-Earnings Ratio = Price per share ÷ Earnings per share
TAST Price-Earnings Ratio = $11.05 ÷ $0.157 = 70.4x
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 want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as TAST, such as size and country of operation. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. At 70.4x, TAST’s P/E is higher than its industry peers (22.2x). This implies that investors are overvaluing each dollar of TAST’s earnings. Therefore, according to this analysis, TAST is an over-priced stock.
Assumptions to watch out for
While our conclusion might prompt you to sell your TAST shares immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to TAST, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with TAST, then its P/E would naturally be lower than its peers, as investors would value those with lower risk at a higher price. The second assumption that must hold true is that the stocks we are comparing TAST to are fairly valued by the market. If this is violated, TAST’s P/E may be lower than its peers as they 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 rebalance your portfolio and reduce your holdings in TAST. 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:
Future Outlook: What are well-informed industry analysts predicting for TAST’s future growth? Take a look at our free research report of analyst consensus for TAST’s outlook.
Past Track Record: Has TAST 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 TAST’s historicals for more clarity.
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.
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.
