Is It Time To Sell Parfex SA (EPA:MLPFX) Based Off Its PE Ratio?

I am writing today to help inform people who are new to the stock market and want to begin learning the link between Parfex SA (EPA:MLPFX)’s fundamentals and stock market performance.

Parfex SA (EPA:MLPFX) trades with a trailing P/E of 45x, which is higher than the industry average of 27.8x. While this makes MLPFX 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. Today, 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 Parfex

What you need to know about 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.

The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. Ultimately, our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to MLPFX, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use below. 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.

At 45x, MLPFX’s P/E is higher than its industry peers (27.8x). This implies that investors are overvaluing each dollar of MLPFX’s earnings. This multiple is a median of profitable companies of 6 Personal Products companies in FR including Laboratoire les 3 Chênes, Jacques Bogart and Millet Innovation. Therefore, according to this analysis, MLPFX is an over-priced stock.

A few caveats

Before you jump to the conclusion that MLPFX should be banished from your portfolio, it is important to realise that our conclusion rests on two important assertions. The first is that our “similar companies” are actually similar to MLPFX. If the companies aren’t similar, the difference in P/E might be a result of other factors. For example, if you inadvertently compared riskier firms with MLPFX, then investors would naturally value MLPFX at a higher price since it is a less risky investment. Similarly, if you accidentally compared lower growth firms with MLPFX, investors would also value MLPFX at a higher price since it is a higher growth investment. Both scenarios would explain why MLPFX has a higher P/E ratio than its peers. The second assumption that must hold true is that the stocks we are comparing MLPFX to are fairly valued by the market. If this assumption does not hold true, MLPFX’s higher P/E ratio may be because firms in our peer group are being undervalued by the market.

What this means for you:

You may have already conducted fundamental analysis on the stock as a shareholder, so its current overvaluation could signal a potential selling opportunity to reduce your exposure to MLPFX. 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:

1. Future Outlook: What are well-informed industry analysts predicting for MLPFX’s future growth? Take a look at our free research report of analyst consensus for MLPFX’s outlook.
2. Financial Health: Is MLPFX’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.
3. 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.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.