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Vishay Precision Group Inc (NYSE:VPG) trades with a trailing P/E of 26.3x, which is higher than the industry average of 21.9x. While VPG 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. 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. View our latest analysis for Vishay Precision Group
Breaking down the Price-Earnings ratio
P/E is a popular ratio used for 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 VPG
Price-Earnings Ratio = Price per share ÷ Earnings per share
VPG Price-Earnings Ratio = $28.5 ÷ $1.082 = 26.3x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to VPG, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. At 26.3x, VPG’s P/E is higher than its industry peers (21.9x). This implies that investors are overvaluing each dollar of VPG’s earnings. Therefore, according to this analysis, VPG is an over-priced stock.
Assumptions to watch out for
While our conclusion might prompt you to sell your VPG shares immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to VPG. 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 VPG, 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 VPG to are fairly valued by the market. If this is violated, VPG’s P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
Since you may have already conducted your due diligence on VPG, the overvaluation of the stock may mean it is a good time to reduce your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I’ve outlined 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: