Earnings Not Telling The Story For Olaplex Holdings, Inc. (NASDAQ:OLPX)

It's not a stretch to say that Olaplex Holdings, Inc.'s (NASDAQ:OLPX) price-to-earnings (or "P/E") ratio of 18.7x right now seems quite "middle-of-the-road" compared to the market in the United States, where the median P/E ratio is around 17x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

With earnings that are retreating more than the market's of late, Olaplex Holdings has been very sluggish. It might be that many expect the dismal earnings performance to revert back to market averages soon, which has kept the P/E from falling. You'd much rather the company wasn't bleeding earnings if you still believe in the business. Or at the very least, you'd be hoping it doesn't keep underperforming if your plan is to pick up some stock while it's not in favour.

View our latest analysis for Olaplex Holdings

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Olaplex Holdings.

Is There Some Growth For Olaplex Holdings?

There's an inherent assumption that a company should be matching the market for P/E ratios like Olaplex Holdings' to be considered reasonable.

Retrospectively, the last year delivered a frustrating 75% decrease to the company's bottom line. Even so, admirably EPS has lifted 51% in aggregate from three years ago, notwithstanding the last 12 months. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Shifting to the future, estimates from the nine analysts covering the company suggest earnings growth is heading into negative territory, declining 22% over the next year. With the market predicted to deliver 11% growth , that's a disappointing outcome.

In light of this, it's somewhat alarming that Olaplex Holdings' P/E sits in line with the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as these declining earnings are likely to weigh on the share price eventually.

The Key Takeaway

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Olaplex Holdings currently trades on a higher than expected P/E for a company whose earnings are forecast to decline. When we see a poor outlook with earnings heading backwards, we suspect share price is at risk of declining, sending the moderate P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Olaplex Holdings that you need to be mindful of.

You might be able to find a better investment than Olaplex Holdings. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St 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. Simply Wall St has no position in any stocks mentioned.