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# Should You Be Tempted To Sell Hooker Furniture Corporation (NASDAQ:HOFT) Because Of Its PE Ratio?

Hooker Furniture Corporation (NASDAQ:HOFT) trades with a trailing P/E of 15.8x, which is higher than the industry average of 15.7x. While HOFT 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. Check out our latest analysis for Hooker Furniture

### Breaking down the P/E ratio

P/E is often used for relative valuation since earnings power is a chief driver of investment value. It compares a stockâ€™s price per share to the stockâ€™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 companyâ€™s earnings.

P/E Calculation for HOFT

Price-Earnings Ratio = Price per share Ã· Earnings per share

HOFT Price-Earnings Ratio = \$38.2 Ã· \$2.423 = 15.8x

The P/E ratio itself doesnâ€™t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. We want to compare the stockâ€™s P/E ratio to the average of companies that have similar characteristics as HOFT, 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 Iâ€™ll do. HOFTâ€™s P/E of 15.8x is higher than its industry peers (15.7x), which implies that each dollar of HOFTâ€™s earnings is being overvalued by investors. As such, our analysis shows that HOFT represents an over-priced stock.

### Assumptions to watch out for

Before you jump to the conclusion that HOFT 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 HOFT. If this isnâ€™t the case, the difference in P/E could be due to other factors. For example, if you are comparing lower risk firms with HOFT, 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 HOFT to are fairly valued by the market. If this does not hold true, HOFTâ€™s lower P/E ratio may be because firms in our peer group are overvalued by the market.

### What this means for you:

You may have already conducted fundamental analysis on the stock as a shareholder, so its current overvaluation could signal a potential selling opportunity to reduce your exposure to HOFT. Now that you understand the ins and outs of the PE metric, you should know to bear in mind its limitations before you make an investment decision. 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:

1. Future Outlook: What are well-informed industry analysts predicting for HOFTâ€™s future growth? Take a look at our free research report of analyst consensus for HOFTâ€™s outlook.
2. Past Track Record: Has HOFT 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 HOFTâ€™s historicals for more clarity.
3. 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.