Stock Analysis

    Does GasLog Ltd's (NYSE:GLOG) PE Ratio Warrant A Sell?

    Source: Shutterstock

    GasLog Ltd (NYSE:GLOG) trades with a trailing P/E of 57.6x, which is higher than the industry average of 13.7x. While GLOG 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 break down what the P/E ratio is, how to interpret it and what to watch out for. View our latest analysis for GasLog

    Advertisement

    What you need to know about the P/E ratio

    NYSE:GLOG PE PEG Gauge Feb 16th 18
    NYSE:GLOG PE PEG Gauge Feb 16th 18

    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.

    Formula

    Price-Earnings Ratio = Price per share ÷ Earnings per share

    P/E Calculation for GLOG

    Price per share = $19.9

    Earnings per share = $0.345

    ∴ Price-Earnings Ratio = $19.9 ÷ $0.345 = 57.6x

    The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. Ideally, we want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as GLOG, 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 similar companies should technically have similar P/E ratios, we can very quickly come to some conclusions about the stock if the ratios differ.

    Since GLOG's P/E of 57.6x is higher than its industry peers (13.7x), it means that investors are paying more than they should for each dollar of GLOG's earnings. As such, our analysis shows that GLOG represents an over-priced stock.

    Assumptions to be aware of

    However, before you rush out to sell your GLOG shares, it is important to note that this conclusion is based on two key assumptions. The first is that our “similar companies” are actually similar to GLOG. If the companies aren’t similar, the difference in P/E might be a result of other factors. For example, if you accidentally compared lower growth firms with GLOG, then GLOG’s P/E would naturally be higher since investors would reward GLOG’s higher growth with a higher price. Alternatively, if you inadvertently compared riskier firms with GLOG, GLOG’s P/E would again be higher since investors would reward GLOG’s lower risk with a higher price as well. The second assumption that must hold true is that the stocks we are comparing GLOG to are fairly valued by the market. If this assumption is violated, GLOG's P/E may be higher than its peers because its peers are actually undervalued by investors.

    NYSE:GLOG Future Profit Feb 16th 18
    NYSE:GLOG Future Profit Feb 16th 18

    What this means for you:

    Since you may have already conducted your due diligence on GLOG, 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:

    New: Manage All Your Stock Portfolios in One Place

    We've created the ultimate portfolio companion for stock investors, and it's free.

    • Connect an unlimited number of Portfolios and see your total in one currency
    • Be alerted to new Warning Signs or Risks via email or mobile
    • Track the Fair Value of your stocks

    Try a Demo Portfolio for Free

    Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com

    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.