Some Shareholders Feeling Restless Over Metrofile Holdings Limited's (JSE:MFL) P/E Ratio

With a median price-to-earnings (or "P/E") ratio of close to 9x in South Africa, you could be forgiven for feeling indifferent about Metrofile Holdings Limited's (JSE:MFL) P/E ratio of 8.5x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Metrofile Holdings has been doing a decent job lately as it's been growing earnings at a reasonable pace. One possibility is that the P/E is moderate because investors think this good earnings growth might only be parallel to the broader market in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

View our latest analysis for Metrofile Holdings

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What Are Growth Metrics Telling Us About The P/E?

In order to justify its P/E ratio, Metrofile Holdings would need to produce growth that's similar to the market.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 4.3% last year. Still, EPS has barely risen at all in aggregate from three years ago, which is not ideal. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

This is in contrast to the rest of the market, which is expected to grow by 11% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it interesting that Metrofile Holdings is trading at a fairly similar P/E to the market. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as a continuation of recent earnings trends is likely to weigh down the shares eventually.

The Final Word

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Metrofile Holdings currently trades on a higher than expected P/E since its recent three-year growth is lower than the wider market forecast. Right now we are uncomfortable with the P/E as this earnings performance isn't likely to support a more positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Metrofile Holdings that you should be aware of.

If these risks are making you reconsider your opinion on Metrofile Holdings, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.