V’s current PE is a sizable 33.19x based on past earnings, significantly outpacing the IT’s average of 24.63x. Yes, this expensive multiple can initially be deterring, but there are many company-specific elements which are not captured in such a static ratio – such as its growth outlook and debt obligations. This article will cover some key aspects we should consider in order to determine the best multiple to be used for V. Let’s take a look below.
Is V making any money?
PE is only used when a company is profitable, such as V. This is because companies that are unprofitable or have recently become loss making cannot be valued using price-to-earnings since there are no earnings. Other useful measures can be employed to evaluate companies in this situation, such as price-to-free-cash-flow or price-to-sales where it is suitable. V’s previous earnings record has continuously produced positive numbers. As earnings forecasts indicate the positive trend will continue, the PE multiple can be an acceptable tool to assess the V’s value, however, there may be a better option.
Does V owe a lot of money?
Yes. As a rule of thumb, debt shouldn’t exceed 40% of equity. Currently, ’s 48.75% debt-to-equity ratio indicates its financial positioning is not optimal. This ratio indicates that for every $1 you invest, the company owes $0.49 to debtors. Although debt can be a cheaper source of capital, it also brings with it some risks around debt obligations and bankruptcy. Though this is an unlikely scenario for a US$294.42b company. So, what does debt have to do with valuation? The company’s share price theoretically reflects the value of V’s equity only, but its important to account for debt, because debt also contributes to the company’s earnings capacity and risk. The EV/EBITDA multiple, which uses EV as a substitute for share price, allows us to incorporate debt into our valuation.
V’s EV/EBITDA = US$304.80b / US$0 = 23.1x
Will V experience high growth?
Given that net income is forecasted to grow by 13.27% each year for the next 5 years, ’s growth outlook seems relatively optimistic. However, current earnings don’t reflect any of this potential growth, which isn’t ideal as you are using past values to gauge future performance. You should pay for what you’re going to get, not what’s already happened. Let’s adjust our previous multiple for future expectations by using projected EBITDA for the next year.
V’s forward EV/EBITDA = US$304.80b /US$15.38b = 19.82x
Looking at relative valuation alone does not give you a complete picture of an investment. There are many important factors I have not taken into account in this article. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for ’s future growth? Take a look at our free research report of analyst consensus for ’s outlook.
- Past Track Record: Has 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 ‘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.