Global Self Storage Inc (NASDAQ:SELF) is trading with a trailing P/E of 83.2x, which is higher than the industry average of 25.4x. 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. In this article, 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 Global Self Storage
Demystifying the P/E ratio
P/E is often used for relative valuation since earnings power is a chief 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 SELF
Price-Earnings Ratio = Price per share ÷ Earnings per share
SELF Price-Earnings Ratio = $4.83 ÷ $0.058 = 83.2x
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 SELF, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use. Since SELF’s P/E of 83.2x is higher than its industry peers (25.4x), it means that investors are paying more than they should for each dollar of SELF’s earnings. Therefore, according to this analysis, SELF is an over-priced stock.
Assumptions to watch out for
While our conclusion might prompt you to sell your SELF shares immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to SELF, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with SELF, then investors would naturally value it at a lower price since it is a riskier investment. The second assumption that must hold true is that the stocks we are comparing SELF to are fairly valued by the market. If this does not hold, there is a possibility that SELF’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
Are you a shareholder? Since you may have already conducted your due diligence on SELF, the overvaluation of the stock may mean it is a good time to reduce your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I’ve outlined above.
Are you a potential investor? If SELF has been on your watch list for a while, it is best you also consider its intrinsic valuation. Looking at PE on its own will not give you the full picture of the stock as an investment, so I suggest you should also look at other relative valuation metrics like EV/EBITDA or PEG.
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 Global Self Storage 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.