Is MGP Ingredients Inc’s (NASDAQ:MGPI) PE Ratio A Signal To Sell For Investors?
MGP Ingredients Inc (NASDAQ:MGPI) is trading with a trailing P/E of 36.1x, which is higher than the industry average of 23.4x. While MGPI 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 break down what the P/E ratio is, how to interpret it and what to watch out for. Check out our latest analysis for MGP Ingredients
Breaking down the P/E ratio
P/E is a popular ratio used for 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.
P/E Calculation for MGPI
Price-Earnings Ratio = Price per share ÷ Earnings per share
MGPI Price-Earnings Ratio = $88.09 ÷ $2.438 = 36.1x
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. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to MGPI, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. At 36.1x, MGPI’s P/E is higher than its industry peers (23.4x). This implies that investors are overvaluing each dollar of MGPI’s earnings. As such, our analysis shows that MGPI represents an over-priced stock.
A few caveats
While our conclusion might prompt you to sell your MGPI shares immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to MGPI. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you are comparing lower risk firms with MGPI, then its P/E would naturally be lower than its peers, as investors would value those with lower risk at a higher price. The second assumption that must hold true is that the stocks we are comparing MGPI to are fairly valued by the market. If this is violated, MGPI’s P/E may be lower than its peers as they are actually overvalued by investors.
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.
