Yahoo Finance Should You Be Tempted To Buy Vipshop Holdings Limited (NYSE:VIPS) At Its Current PE Ratio?
The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want to start learning about core concepts of fundamental analysis on practical examples from today’s market.
Vipshop Holdings Limited (NYSE:VIPS) trades with a trailing P/E of 12x, which is lower than the industry average of 33.8x. While this makes VIPS appear like a great stock to buy, you might change your mind after I explain the assumptions behind the P/E ratio. Today, I will explain what the P/E ratio is as well as what you should look out for when using it.
Check out our latest analysis for Vipshop Holdings
What you need to know about the P/E ratio
The P/E ratio is one of many ratios used in 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 VIPS
Price-Earnings Ratio = Price per share ÷ Earnings per share
VIPS Price-Earnings Ratio = CN¥42.86 ÷ CN¥3.558 = 12x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful 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 VIPS, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use. VIPS’s P/E of 12 is lower than its industry peers (33.8), which implies that each dollar of VIPS’s earnings is being undervalued by investors. This multiple is a median of profitable companies of 24 Online Retail companies in US including Liberty Ventures, Acorn International and Jumei International Holding. You can think of it like this: the market is suggesting that VIPS is a weaker business than the average comparable company.
Assumptions to be aware of
Before you jump to conclusions it is important to realise that our assumptions rests on two assertions. The first is that our “similar companies” are actually similar to VIPS, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with VIPS, 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 VIPS to are fairly valued by the market. If this is violated, VIPS’s P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
Since you may have already conducted your due diligence on VIPS, the undervaluation of the stock may mean it is a good time to top up on 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 VIPS’s future growth? Take a look at our free research report of analyst consensus for VIPS’s outlook.
Past Track Record: Has VIPS 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 VIPS’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 past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
