Yahoo Finance Is It Time To Buy Vivint Solar Inc (NYSE:VSLR) Based Off Its PE Ratio?
The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want to begin learning the link between Vivint Solar Inc (NYSE:VSLR)’s fundamentals and stock market performance.
Vivint Solar Inc (NYSE:VSLR) is currently trading at a trailing P/E of 3.2x, which is lower than the industry average of 17.4x. 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. Today, I will break down what the P/E ratio is, how to interpret it and what to watch out for. View out our latest analysis for Vivint Solar
Demystifying the P/E ratio
The P/E ratio is a popular ratio used in relative valuation since earnings power is a key driver of investment value. 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 VSLR
Price-Earnings Ratio = Price per share ÷ Earnings per share
VSLR Price-Earnings Ratio = $5.15 ÷ $1.601 = 3.2x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful 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 VSLR, 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 VSLR’s P/E of 3.2x is lower than its industry peers (17.4x), it means that investors are paying less than they should for each dollar of VSLR’s earnings. Therefore, according to this analysis, VSLR is an under-priced stock.
Assumptions to be aware of
Before you jump to the conclusion that VSLR is the perfect buying opportunity, it is important to realise that our conclusion rests on two assertions. Firstly, our peer group contains companies that are similar to VSLR. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared higher growth firms with VSLR, 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 VSLR to are fairly valued by the market. If this is violated, VSLR’s P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
You may have already conducted fundamental analysis on the stock as a shareholder, so its current undervaluation could signal a good buying opportunity to increase your exposure to VSLR. Now that you understand the ins and outs of the PE metric, you should know to bear in mind its limitations before you make an investment decision. 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 VSLR’s future growth? Take a look at our free research report of analyst consensus for VSLR’s outlook.
Past Track Record: Has VSLR 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 VSLR’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.
