Should You Be Tempted To Sell At Home Group Inc (NYSE:HOME) At Its Current PE Ratio?
At Home Group Inc (NYSE:HOME) is currently trading at a trailing P/E of 44.8x, which is higher than the industry average of 18.5x. While HOME 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. In this article, I will explain what the P/E ratio is as well as what you should look out for when using it. Check out our latest analysis for At Home Group
Demystifying the P/E ratio
P/E is a popular ratio used for relative valuation. It compares a stock’s price per share to the stock’s earnings per share. A more intuitive way of understanding the P/E ratio is to think of it as how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for HOME
Price-Earnings Ratio = Price per share ÷ Earnings per share
HOME Price-Earnings Ratio = $27.63 ÷ $0.616 = 44.8x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to HOME, such as company lifetime and products sold. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. At 44.8x, HOME’s P/E is higher than its industry peers (18.5x). This implies that investors are overvaluing each dollar of HOME’s earnings. As such, our analysis shows that HOME represents an over-priced stock.
A few caveats
However, before you rush out to sell your HOME 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 HOME. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you are comparing lower risk firms with HOME, 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 HOME to are fairly valued by the market. If this does not hold true, HOME’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.
