I am writing today to help inform people who are new to the stock market and want to begin learning the link between Vince Holding Corp (NYSE:VNCE)’s fundamentals and stock market performance.
Vince Holding Corp (NYSE:VNCE) is trading with a trailing P/E of 1.8x, which is lower than the industry average of 24.7x. While VNCE might seem like an attractive stock to buy, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for. View out our latest analysis for Vince Holding
Breaking down the Price-Earnings ratio
The P/E ratio is a popular ratio used in relative valuation since earnings power is a key driver of investment value. 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.
Price-Earnings Ratio = Price per share ÷ Earnings per share
P/E Calculation for VNCE
Price per share = $13.69
Earnings per share = $7.704
∴ Price-Earnings Ratio = $13.69 ÷ $7.704 = 1.8x
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. Ultimately, our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to VNCE, 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 similar companies should technically have similar P/E ratios, we can very quickly come to some conclusions about the stock if the ratios differ.
At 1.8x, VNCE’s P/E is lower than its industry peers (24.7x). This implies that investors are undervaluing each dollar of VNCE’s earnings. As such, our analysis shows that VNCE represents an under-priced stock.
A few caveats
However, before you rush out to buy VNCE, it is important to note that this conclusion is based on two key assumptions. The first is that our peer group actually contains companies that are similar to VNCE. If this isn’t the case, the difference in P/E could be due to some other factors. For example, if you inadvertently compared lower risk firms with VNCE, then investors would naturally value VNCE at a lower price since it is a riskier investment. Similarly, if you accidentally compared higher growth firms with VNCE, investors would also value VNCE at a lower price since it is a lower growth investment. Both scenarios would explain why VNCE has a lower P/E ratio than its peers. The second assumption that must hold true is that the stocks we are comparing VNCE to are fairly valued by the market. If this assumption does not hold true, VNCE’s lower P/E ratio may be because firms in our peer group are being overvalued by the market.
What this means for you:
If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to add more of VNCE to your portfolio. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned 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 highly recommend you to complete your research by taking a look at the following:
- Financial Health: Is VNCE’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
- Past Track Record: Has VNCE 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 VNCE’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.