Wilhelmina International Inc (NASDAQ:WHLM) trades with a trailing P/E of 102x, which is higher than the industry average of 18.2x. While WHLM might seem like a stock to avoid or sell if you own it, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. Today, I will explain what the P/E ratio is as well as what you should look out for when using it. See our latest analysis for Wilhelmina International
What you need to know about the P/E ratio
A common ratio used for relative valuation is the P/E ratio. 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 WHLM
Price-Earnings Ratio = Price per share ÷ Earnings per share
WHLM Price-Earnings Ratio = $7.18 ÷ $0.07 = 102x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to WHLM, 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 102x, WHLM’s P/E is higher than its industry peers (18.2x). This implies that investors are overvaluing each dollar of WHLM’s earnings. As such, our analysis shows that WHLM represents an over-priced stock.
A few caveats
While our conclusion might prompt you to sell your WHLM shares immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to WHLM, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with WHLM, 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 WHLM to are fairly valued by the market. If this does not hold, there is a possibility that WHLM’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to rebalance your portfolio and reduce your holdings in WHLM. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned above. Remember that basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PE ratio is very one-dimensional. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:
- Financial Health: Is WHLM’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
- Past Track Record: Has WHLM been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of WHLM’s historicals for more clarity.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
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.