Kilroy Realty Corporation (NYSE:KRC) trades with a trailing P/E of 44.8x, which is higher than the industry average of 19.9x. While this makes KRC 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 break down what the P/E ratio is, how to interpret it and what to watch out for. See our latest analysis for Kilroy Realty

Breaking down the Price-Earnings 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 KRC

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

KRC Price-Earnings Ratio = $68.18 ÷ $1.521 = 44.8x

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. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to KRC, 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 KRC’s P/E of 44.8x is higher than its industry peers (19.9x), it means that investors are paying more than they should for each dollar of KRC’s earnings. As such, our analysis shows that KRC represents an over-priced stock.

Assumptions to be aware of

Before you jump to the conclusion that KRC 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 KRC, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with KRC, then its P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing KRC to are fairly valued by the market. If this does not hold, there is a possibility that KRC’s P/E is lower because our peer group is overvalued by the market.

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.