Yahoo Finance Should You Be Tempted To Sell ZAGG Inc (NASDAQ:ZAGG) At Its Current PE Ratio?
I am writing today to help inform people who are new to the stock market and want to better understand how you can grow your money by investing in ZAGG Inc (NASDAQ:ZAGG).
ZAGG Inc (NASDAQ:ZAGG) is currently trading at a trailing P/E of 17.4x, which is higher than the industry average of 15.1x. 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. Today, I will explain what the P/E ratio is as well as what you should look out for when using it. View out our latest analysis for ZAGG
Breaking down the Price-Earnings ratio
The P/E ratio is a popular ratio used in relative valuation since earnings power is a key 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 ZAGG
Price-Earnings Ratio = Price per share ÷ Earnings per share
ZAGG Price-Earnings Ratio = $17.5 ÷ $1.008 = 17.4x
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 ZAGG, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. Since ZAGG’s P/E of 17.4x is higher than its industry peers (15.1x), it means that investors are paying more than they should for each dollar of ZAGG’s earnings. As such, our analysis shows that ZAGG represents an over-priced stock.
Assumptions to watch out for
While our conclusion might prompt you to sell your ZAGG shares immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to ZAGG. 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 ZAGG, 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 ZAGG to are fairly valued by the market. If this does not hold true, ZAGG’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
What this means for you:
Since you may have already conducted your due diligence on ZAGG, 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. 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:
Future Outlook: What are well-informed industry analysts predicting for ZAGG’s future growth? Take a look at our free research report of analyst consensus for ZAGG’s outlook.
Past Track Record: Has ZAGG 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 ZAGG’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.
