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A Rising Share Price Has Us Looking Closely At Vipshop Holdings Limited's (NYSE:VIPS) P/E Ratio

Simply Wall St

It's really great to see that even after a strong run, Vipshop Holdings (NYSE:VIPS) shares have been powering on, with a gain of 33% in the last thirty days. That's tops off a massive gain of 119% in the last year.

All else being equal, a sharp share price increase should make a stock less attractive to potential investors. 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. So some would prefer to hold off buying when there is a lot of optimism towards a stock. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.

View our latest analysis for Vipshop Holdings

How Does Vipshop Holdings's P/E Ratio Compare To Its Peers?

Vipshop Holdings's P/E of 17.96 indicates relatively low sentiment towards the stock. If you look at the image below, you can see Vipshop Holdings has a lower P/E than the average (28.0) in the online retail industry classification.

NYSE:VIPS Price Estimation Relative to Market, November 18th 2019

Vipshop Holdings's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with Vipshop Holdings, it's quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and 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 even if the current P/E is high, it will reduce over time if the share price stays flat. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

Notably, Vipshop Holdings grew EPS by a whopping 49% in the last year. And it has bolstered its earnings per share by 33% per year over the last five years. I'd therefore be a little surprised if its P/E ratio was not relatively high.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. That means it doesn't take debt or cash into account. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).

Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).

How Does Vipshop Holdings's Debt Impact Its P/E Ratio?

Vipshop Holdings has net cash of CN¥3.9b. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.

The Verdict On Vipshop Holdings's P/E Ratio

Vipshop Holdings has a P/E of 18.0. That's around the same as the average in the US market, which is 18.2. Its net cash position is the cherry on top of its superb EPS growth. So at a glance we're a bit surprised that Vipshop Holdings does not have a higher P/E ratio. All the more so, since analysts expect further profit growth. Click here to research this potential opportunity.. What we know for sure is that investors have become more excited about Vipshop Holdings recently, since they have pushed its P/E ratio from 13.5 to 18.0 over the last month. For those who prefer to invest with the flow of momentum, that might mean it's time to put the stock on a watchlist, or research it. But the contrarian may see it as a missed opportunity.

Investors should be looking to buy stocks that the market is wrong about. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.

Of course you might be able to find a better stock than Vipshop Holdings. So you may wish to see this free collection of other companies that have grown earnings strongly.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.