Yahoo Finance Is Copart Inc’s (NASDAQ:CPRT) PE Ratio A Signal To Sell For Investors?
Copart Inc (NASDAQ:CPRT) trades with a trailing P/E of 34.9x, which is higher than the industry average of 18.5x. While CPRT 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 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 Copart
Breaking down the Price-Earnings ratio
P/E is a popular ratio used for relative valuation. 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 CPRT
Price-Earnings Ratio = Price per share ÷ Earnings per share
CPRT Price-Earnings Ratio = $57.07 ÷ $1.638 = 34.9x
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 CPRT, 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 I’ll do. At 34.9x, CPRT’s P/E is higher than its industry peers (18.5x). This implies that investors are overvaluing each dollar of CPRT’s earnings. As such, our analysis shows that CPRT represents an over-priced stock.
A few caveats
However, before you rush out to sell your CPRT 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 CPRT, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with CPRT, 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 CPRT to are fairly valued by the market. If this does not hold, there is a possibility that CPRT’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
Since you may have already conducted your due diligence on CPRT, 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 urge you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for CPRT’s future growth? Take a look at our free research report of analyst consensus for CPRT’s outlook.
Past Track Record: Has CPRT 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 CPRT’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.
