The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll show how you can use Vente-Unique.com SA’s (EPA:ALVU) P/E ratio to inform your assessment of the investment opportunity. Looking at earnings over the last twelve months, Vente-Unique.com has a P/E ratio of 13.94. In other words, at today’s prices, investors are paying €13.94 for every €1 in prior year profit.
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Vente-Unique.com:
P/E of 13.94 = €3.55 ÷ €0.25 (Based on the trailing twelve months to March 2019.)
Is A High P/E Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. All else being equal, it’s better to pay a low price — but as Warren Buffett said, ‘It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.’
Does Vente-Unique.com Have A Relatively High Or Low P/E For Its Industry?
We can get an indication of market expectations by looking at the P/E ratio. If you look at the image below, you can see Vente-Unique.com has a lower P/E than the average (18.8) in the online retail industry classification.
This suggests that market participants think Vente-Unique.com will underperform other companies in its industry.
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the ‘E’ will be lower. That means unless the share price falls, the P/E will increase in a few years. Then, a higher P/E might scare off shareholders, pushing the share price down.
Vente-Unique.com shrunk earnings per share by 38% over the last year. And it has shrunk its earnings per share by 4.2% per year over the last five years. This growth rate might warrant a below average P/E ratio.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
Don’t forget that the P/E ratio considers market capitalization. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).
Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.
Is Debt Impacting Vente-Unique.com’s P/E?
With net cash of €12m, Vente-Unique.com has a very strong balance sheet, which may be important for its business. Having said that, at 36% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.
The Verdict On Vente-Unique.com’s P/E Ratio
Vente-Unique.com has a P/E of 13.9. That’s below the average in the FR market, which is 16.6. Falling earnings per share are likely to be keeping potential buyers away, the relatively strong balance sheet will allow the company time to invest in growth. If it achieves that, then there’s real potential that the low P/E could eventually indicate undervaluation.
Investors should be looking to buy stocks that the market is wrong about. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free report on the analyst consensus forecasts could help you make a master move on this stock.
You might be able to find a better buy than Vente-Unique.com. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.