This article is intended for those of you who are at the beginning of your investing journey and want to better understand how you can grow your money by investing in US Ecology Inc (NASDAQ:ECOL).
US Ecology Inc (NASDAQ:ECOL) is trading with a trailing P/E of 25.3x, which is higher than the industry average of 18.3x. 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. See our latest analysis for US Ecology
Demystifying the P/E ratio
A common ratio used for relative valuation is the P/E ratio. 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 ECOL
Price-Earnings Ratio = Price per share ÷ Earnings per share
ECOL Price-Earnings Ratio = $61.95 ÷ $2.453 = 25.3x
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 ECOL, 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. Since ECOL’s P/E of 25.3x is higher than its industry peers (18.3x), it means that investors are paying more than they should for each dollar of ECOL’s earnings. As such, our analysis shows that ECOL represents an over-priced stock.
A few caveats
Before you jump to the conclusion that ECOL should be banished from your portfolio, it is important to realise that our conclusion rests on two assertions. The first is that our “similar companies” are actually similar to ECOL, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with ECOL, 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 ECOL to are fairly valued by the market. If this is violated, ECOL’s P/E may be lower than its peers as they are actually overvalued by investors.
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 ECOL. 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 urge you to complete your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for ECOL’s future growth? Take a look at our free research report of analyst consensus for ECOL’s outlook.
- Past Track Record: Has ECOL 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 ECOL’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.