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 better understand how you can grow your money by investing in O Sorbet D’amour SA (EPA:MLOSA).
O Sorbet D’amour SA (EPA:MLOSA) is currently trading at a trailing P/E of 72.9x, which is higher than the industry average of 17x. While this makes MLOSA appear like a stock to avoid or sell if you own it, you might change your mind after I explain the assumptions behind the P/E ratio. 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. See our latest analysis for O Sorbet D’amour
Demystifying the P/E ratio
The P/E ratio is one of many ratios used in 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.
Price-Earnings Ratio = Price per share ÷ Earnings per share
P/E Calculation for MLOSA
Price per share = €5.45
Earnings per share = €0.0748
∴ Price-Earnings Ratio = €5.45 ÷ €0.0748 = 72.9x
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 preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to MLOSA, such as capital structure and profitability. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. Since it is expected that similar companies have similar P/E ratios, we can come to some conclusions about the stock if the ratios are different.
Since MLOSA’s P/E of 72.9x is higher than its industry peers (17x), it means that investors are paying more than they should for each dollar of MLOSA’s earnings. This multiple is a median of profitable companies of 16 Food companies in FR including Sapmer, Savencia and Malteries Franco-Belges Société Anonyme. As such, our analysis shows that MLOSA represents an over-priced stock.
Assumptions to watch out for
However, before you rush out to sell your MLOSA shares, it is important to note that this conclusion is based on two key assumptions. The first is that our peer group actually contains companies that are similar to MLOSA. If this isn’t the case, the difference in P/E could be due to some other factors. For example, if you are inadvertently comparing riskier firms with MLOSA, then MLOSA’s P/E would naturally be higher than its peers since investors would reward its lower risk with a higher price. The other possibility is if you were accidentally comparing lower growth firms with MLOSA. In this case, MLOSA’s P/E would be higher since investors would also reward MLOSA’s higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing MLOSA to are fairly valued by the market. If this assumption is violated, MLOSA’s P/E may be higher than its peers because its peers are actually undervalued by investors.
What this means for you:
Since you may have already conducted your due diligence on MLOSA, 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 urge you to complete your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for MLOSA’s future growth? Take a look at our free research report of analyst consensus for MLOSA’s outlook.
- Financial Health: Is MLOSA’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
- 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.