When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 17x, you may consider Vipshop Holdings Limited (NYSE:VIPS) as an attractive investment with its 9.2x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
Recent times have been pleasing for Vipshop Holdings as its earnings have risen in spite of the market's earnings going into reverse. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
View our latest analysis for Vipshop Holdings
Is There Any Growth For Vipshop Holdings?
There's an inherent assumption that a company should underperform the market for P/E ratios like Vipshop Holdings' to be considered reasonable.
If we review the last year of earnings growth, the company posted a terrific increase of 55%. Pleasingly, EPS has also lifted 87% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.
Looking ahead now, EPS is anticipated to climb by 9.4% during the coming year according to the analysts following the company. That's shaping up to be similar to the 10% growth forecast for the broader market.
With this information, we find it odd that Vipshop Holdings is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting lower selling prices.
The Final Word
Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
Our examination of Vipshop Holdings' analyst forecasts revealed that its market-matching earnings outlook isn't contributing to its P/E as much as we would have predicted. There could be some unobserved threats to earnings preventing the P/E ratio from matching the outlook. It appears some are indeed anticipating earnings instability, because these conditions should normally provide more support to the share price.
Many other vital risk factors can be found on the company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Vipshop Holdings with six simple checks.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.