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Those holding V2 Retail (NSE:V2RETAIL) shares must be pleased that the share price has rebounded 33% in the last thirty days. But unfortunately, the stock is still down by 31% over a quarter. But that will do little to salve the savage burn caused by the 66% share price decline, over the last year.
Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. The implication here is that deep value investors might steer clear when expectations of a company are too high. Perhaps the simplest way to get a read on investors' expectations of a business is to look at its Price to Earnings Ratio (PE Ratio). A high P/E ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.
See our latest analysis for V2 Retail
How Does V2 Retail's P/E Ratio Compare To Its Peers?
V2 Retail's P/E of 20.80 indicates relatively low sentiment towards the stock. The image below shows that V2 Retail has a lower P/E than the average (58.0) P/E for companies in the multiline retail industry.
This suggests that market participants think V2 Retail will underperform other companies in its industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. You should delve deeper. I like to check if company insiders have been buying or selling.
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. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. That means unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.
V2 Retail shrunk earnings per share by 40% over the last year. But over the longer term (3 years), earnings per share have increased by 9.8%.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. In other words, it does not consider any debt or cash that the company may have on the balance sheet. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.