Yahoo Finance Is It Time To Buy Steven Madden Ltd (NASDAQ:SHOO) Based Off Its PE Ratio?
Steven Madden Ltd (NASDAQ:SHOO) is trading with a trailing P/E of 23.7x, which is lower than the industry average of 24.9x. 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 deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. Check out our latest analysis for Steven Madden
Breaking down 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 SHOO
Price-Earnings Ratio = Price per share ÷ Earnings per share
SHOO Price-Earnings Ratio = $54.7 ÷ $2.304 = 23.7x
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 SHOO, 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. SHOO’s P/E of 23.7x is lower than its industry peers (24.9x), which implies that each dollar of SHOO’s earnings is being undervalued by investors. Therefore, according to this analysis, SHOO is an under-priced stock.
Assumptions to be aware of
However, before you rush out to buy SHOO, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to SHOO. 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 SHOO, 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 SHOO to are fairly valued by the market. If this does not hold, there is a possibility that SHOO’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 add more of SHOO 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 urge you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for SHOO’s future growth? Take a look at our free research report of analyst consensus for SHOO’s outlook.
Past Track Record: Has SHOO 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 SHOO’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.
