A common way to value stocks is to look at the shares themselves. price-earnings (P/E) ratio. As a general rule, the lower the stock, the cheaper the stock; But there are a few important caveats to consider: The sustainability of earnings and the firm’s debt are both important. Currently a well known FTSE250 The stock sells for pennies and the P/E ratio is just 8.

So is it a bargain I should buy for my portfolio?

Well-known consumer brand

The share in question Doctor Martens (LSE: DOCUMENTS).

With an iconic shoe brand, a large customer base and a unique place in the market, I think there is a lot to love about the business.

So why are FTSE 250 shares selling for pennies? (So ​​why has it fallen 88% since listing on the London Stock Exchange just three years ago?)

The answer lies in the company’s recent poor performance.

Let’s take last year as an example. Revenues fell 12 percent. Profit after tax fell 46%.

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Net debt increased by 24%. As I said above, debt is important when it comes to valuation because servicing and repayment can eat into earnings.

Return potential

Yet while the company’s after-tax profits fell badly, they remained solid. in black. It cut the dividend but did not cancel it completely.

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Weak consumer demand in the US was cited as the main reason for last year’s weak performance. However, the business has announced plans to address this issue, including increasing marketing spend in the critical region.

The latest update came in July, when the company said trading in the last quarter was in line with expectations. I think a big test is coming this month when Dr Martens will announce its interim results.

I think the current share price could be a bargain if it contains positive news regarding sales trends and costs.

However, the opposite can also happen. If there are only weak signs (or no) of a turnaround, the share price could fall further. Dr Martens shoes aren’t cheap, and US consumer spending remains quite weak.

I don’t buy

I’m in no rush to buy here. The huge decline in the company’s share price since its IPO points to a number of factors that concern me, from net debt to the apparent fragility of its business model.

At best, I think the business could start to show signs of a recovery and see share prices rise. But such a turnaround is unlikely to happen overnight. So it would probably be time for me to buy when the evidence comes, even if it means paying a higher price for the FTSE 250 share than it is today.

In the meantime, the risks worry me. Dr Martens is a strong brand but a business struggling with great challenges. These may continue.