This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll look at Vente-Unique.com SA’s (EPA:ALVU) P/E ratio and reflect on what it tells us about the company’s share price. Based on the last twelve months, Vente-Unique.com’s P/E ratio is 13.88. That means that at current prices, buyers pay €13.88 for every €1 in trailing yearly profits.
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How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Vente-Unique.com:
P/E of 13.88 = €5.7 ÷ €0.41 (Based on the trailing twelve months to March 2018.)
Is A High P/E Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each €1 of company earnings. That isn’t necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
How Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. When earnings grow, the ‘E’ increases, over time. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.
Most would be impressed by Vente-Unique.com earnings growth of 21% in the last year. And earnings per share have improved by 14% annually, over the last five years. With that performance, you might expect an above average P/E ratio.
How Does Vente-Unique.com’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. We can see in the image below that the average P/E (22.3) for companies in the online retail industry is higher than Vente-Unique.com’s P/E.
This suggests that market participants think Vente-Unique.com will underperform other companies in its industry. Since the market seems unimpressed with Vente-Unique.com, it’s quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or selling.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
The ‘Price’ in P/E reflects the market capitalization of the company. That means it doesn’t take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
Is Debt Impacting Vente-Unique.com’s P/E?
Vente-Unique.com has net cash of €710k. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.
The Verdict On Vente-Unique.com’s P/E Ratio
Vente-Unique.com’s P/E is 13.9 which is about average (14.9) in the FR market. With a strong balance sheet combined with recent growth, the P/E implies the market is quite pessimistic.
When the market is wrong about a stock, it gives savvy investors an opportunity. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.
Of course you might be able to find a better stock than Vente-Unique.com. So you may wish to see this free collection of other companies that have grown earnings strongly.
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 firstname.lastname@example.org.