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Should You Be Tempted To Sell Growthpoint Properties Australia (ASX:GOZ) At Its Current PE Ratio?

Growthpoint Properties Australia (ASX:GOZ) is trading with a trailing P/E of 8x, which is higher than the industry average of 7.7x. While GOZ might seem like a stock to avoid or sell if you own it, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. Today, 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 Growthpoint Properties Australia

Breaking down the P/E ratio

ASX:GOZ PE PEG Gauge Jan 9th 18
ASX:GOZ PE PEG Gauge Jan 9th 18

P/E is a popular ratio used for 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 GOZ

Price-Earnings Ratio = Price per share ÷ Earnings per share

GOZ Price-Earnings Ratio = A$3.4 ÷ A$0.427 = 8x

On its own, the P/E ratio doesn’t tell you much; however, it becomes extremely useful 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 GOZ, 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. GOZ’s P/E of 8x is higher than its industry peers (7.7x), which implies that each dollar of GOZ’s earnings is being overvalued by investors. Therefore, according to this analysis, GOZ is an over-priced stock.

Assumptions to be aware of

However, before you rush out to sell your GOZ shares, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to GOZ. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared lower risk firms with GOZ, 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 GOZ to are fairly valued by the market. If this does not hold true, GOZ’s lower P/E ratio may be because firms in our peer group are overvalued by the market.

What this means for you:

Are you a shareholder? 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 GOZ. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned above.

Are you a potential investor? If you are considering investing in GOZ, looking at the PE ratio on its own is not enough to make a well-informed decision. You will benefit from looking at additional analysis and considering its intrinsic valuation along with other relative valuation metrics like PEG and EV/Sales.

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 Growthpoint Properties Australia 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.

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