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Does Micro Focus International plc’s (LON:MCRO) PE Ratio Warrant A Sell?

Micro Focus International plc (LSE:MCRO) trades with a trailing P/E of 45.1x, which is higher than the industry average of 29.7x. While MCRO might seem like a stock to avoid or sell if you own it, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. In this article, I will explain what the P/E ratio is as well as what you should look out for when using it. View our latest analysis for Micro Focus International

Demystifying the P/E ratio

LSE:MCRO PE PEG Gauge Feb 1st 18
LSE:MCRO PE PEG Gauge Feb 1st 18

P/E is often used for relative valuation since earnings power is a chief driver of investment value. 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 pound of the company’s earnings.

P/E Calculation for MCRO

Price-Earnings Ratio = Price per share ÷ Earnings per share

MCRO Price-Earnings Ratio = $30.74 ÷ $0.682 = 45.1x

The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to MCRO, such as capital structure and profitability. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. MCRO’s P/E of 45.1x is higher than its industry peers (29.7x), which implies that each dollar of MCRO’s earnings is being overvalued by investors. As such, our analysis shows that MCRO represents an over-priced stock.

Assumptions to be aware of

Before you jump to the conclusion that MCRO should be banished from your portfolio, it is important to realise that our conclusion rests on two assertions. Firstly, our peer group contains companies that are similar to MCRO. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared lower risk firms with MCRO, then investors would naturally value it at a lower price since it is a riskier investment. The second assumption that must hold true is that the stocks we are comparing MCRO to are fairly valued by the market. If this does not hold true, MCRO’s lower P/E ratio may be because firms in our peer group are overvalued by the market.


To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.

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