Victory Capital Holdings Inc (NASDAQ:VCTR) is trading with a trailing P/E of 61.3x, which is higher than the industry average of 16.9x. While this makes VCTR 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. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for. See our latest analysis for Victory Capital Holdings
Breaking down the P/E ratio
The P/E ratio is one of many ratios used in relative valuation. By comparing a stock’s price per share to its earnings per share, we are able to see how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for VCTR
Price-Earnings Ratio = Price per share ÷ Earnings per share
VCTR Price-Earnings Ratio = $13.26 ÷ $0.216 = 61.3x
On its own, the P/E ratio doesn’t tell you much; however, it becomes extremely useful when you compare it with other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to VCTR, such as company lifetime and products sold. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. Since VCTR’s P/E of 61.3x is higher than its industry peers (16.9x), it means that investors are paying more than they should for each dollar of VCTR’s earnings. As such, our analysis shows that VCTR represents an over-priced stock.
A few caveats
Before you jump to the conclusion that VCTR should be banished from your portfolio, it is important to realise that our conclusion rests on two assertions. Firstly, our peer group contains companies that are similar to VCTR. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared lower risk firms with VCTR, then investors would naturally value it at a lower price since it is a riskier investment. The second assumption that must hold true is that the stocks we are comparing VCTR to are fairly valued by the market. If this is violated, VCTR’s P/E may be lower than its peers as they are actually overvalued by investors.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.