Yahoo Finance Does Perry Ellis International Inc’s (NASDAQ:PERY) PE Ratio Signal A Buying Opportunity?
I am writing today to help inform people who are new to the stock market and want to better understand how you can grow your money by investing in Perry Ellis International Inc (NASDAQ:PERY).
Perry Ellis International Inc (NASDAQ:PERY) is trading with a trailing P/E of 7.6x, which is lower than the industry average of 25.1x. Although some investors may jump to the conclusion that this is a great buying opportunity, understanding the assumptions behind the P/E ratio might change your mind. In this article, 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 Perry Ellis International
What you need to know about the P/E ratio
The P/E ratio is one of many ratios used in relative valuation. 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 PERY
Price-Earnings Ratio = Price per share ÷ Earnings per share
PERY Price-Earnings Ratio = $27.3 ÷ $3.58 = 7.6x
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. We want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as PERY, such as size and country of operation. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. At 7.6x, PERY’s P/E is lower than its industry peers (25.1x). This implies that investors are undervaluing each dollar of PERY’s earnings. As such, our analysis shows that PERY represents an under-priced stock.
Assumptions to be aware of
While our conclusion might prompt you to buy PERY immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to PERY, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with PERY, 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 PERY to are fairly valued by the market. If this is violated, PERY’s P/E may be lower than its peers as they are actually overvalued by investors.
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 add more of PERY to your portfolio. 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:
Future Outlook: What are well-informed industry analysts predicting for PERY’s future growth? Take a look at our free research report of analyst consensus for PERY’s outlook.
Past Track Record: Has PERY 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 PERY’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.