VOXX International Corporation (NASDAQ:VOXX) trades with a trailing P/E of 36x, which is higher than the industry average of 14.2x. While this makes VOXX appear like a stock to avoid or sell if you own it, you might change your mind after I explain the assumptions behind the P/E ratio. Today, I will break down what the P/E ratio is, how to interpret it and what to watch out for. View our latest analysis for VOXX International
Breaking down the P/E ratio
The P/E ratio is a popular ratio used in relative valuation since earnings power is a key driver of investment value. It compares a stock’s price per share to the stock’s earnings per share. A more intuitive way of understanding the P/E ratio is to think of it as how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for VOXX
Price-Earnings Ratio = Price per share ÷ Earnings per share
VOXX Price-Earnings Ratio = 8.5 ÷ 0.236 = 36x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to VOXX, such as capital structure and profitability. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. At 36x, VOXX’s P/E is higher than its industry peers (14.2x). This implies that investors are overvaluing each dollar of VOXX’s earnings. Therefore, according to this analysis, VOXX is an over-priced stock.
Assumptions to watch out for
While our conclusion might prompt you to sell your VOXX shares immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to VOXX, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with VOXX, then its P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing VOXX to are fairly valued by the market. If this does not hold, there is a possibility that VOXX’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
Are you a shareholder? You may have already conducted fundamental analysis on the stock as a shareholder, so its current overvaluation could signal a potential selling opportunity to reduce your exposure to VOXX. Now that you understand the ins and outs of the PE metric, you should know to bear in mind its limitations before you make an investment decision.