Should You Be Tempted To Sell ZAGG Inc (NASDAQ:ZAGG) At Its Current PE Ratio?

This analysis is intended to introduce important early concepts to people who are starting to invest and want to better understand how you can grow your money by investing in ZAGG Inc (NASDAQ:ZAGG).

ZAGG Inc (NASDAQ:ZAGG) trades with a trailing P/E of 16.9x, which is higher than the industry average of 15x. While this makes ZAGG appear like a stock to avoid or sell if you own it, you might change your mind after I explain the assumptions behind the P/E ratio. 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 ZAGG

What you need to know about the P/E ratio

A common ratio used for relative valuation is the P/E ratio. 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.

The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. Ultimately, 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. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. Since it is expected that similar companies have similar P/E ratios, we can come to some conclusions about the stock if the ratios are different.

Since ZAGG's P/E of 16.9x is higher than its industry peers (15x), it means that investors are paying more than they should for each dollar of ZAGG's earnings. This multiple is a median of profitable companies of 25 Consumer Durables companies in US including Deer Consumer Products, Aivtech International Group and Samson Holding. As such, our analysis shows that ZAGG represents an over-priced stock.

Assumptions to watch out for

Before you jump to the conclusion that ZAGG should be banished from your portfolio, it is important to realise that our conclusion rests on two important assertions. The first is that our peer group actually contains companies that are similar to ZAGG. If this isn’t the case, the difference in P/E could be due to some other factors. For example, if you accidentally compared lower growth firms with ZAGG, then ZAGG’s P/E would naturally be higher since investors would reward ZAGG’s higher growth with a higher price. Alternatively, if you inadvertently compared riskier firms with ZAGG, ZAGG’s P/E would again be higher since investors would reward ZAGG’s lower risk with a higher price as well. The second assumption that must hold true is that the stocks we are comparing ZAGG to are fairly valued by the market. If this assumption does not hold true, ZAGG’s higher P/E ratio may be because firms in our peer group are being undervalued 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 ZAGG. 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 ZAGG’s future growth? Take a look at our free research report of analyst consensus for ZAGG’s outlook.
2. 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.
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.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.