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For a profitable company like Parsons, the P/E ratio is a useful way to gauge what investors are currently willing to pay for each dollar of earnings. It captures not only today’s profitability but also what the market expects for future earnings and the risks around those expectations.

In general, higher growth expectations and lower perceived risk can support a higher “normal” or “fair” P/E, while slower expected growth or higher risk tends to justify a lower multiple. Parsons currently trades on a P/E of 32.08x. That sits above the Professional Services industry average of 24.92x and below the peer group average of 43.99x. This shows the stock is priced somewhere between broader sector levels and its closest peers.

Simply Wall St’s Fair Ratio for Parsons is 26.01x. This is a proprietary estimate of what a reasonable P/E might be, given factors such as earnings growth, profit margins, industry, market cap and company specific risks. Because it blends these inputs, the Fair Ratio can often be more tailored than a simple comparison with peers or the industry alone. On this basis, Parsons’ current P/E of 32.08x sits above the Fair Ratio, which points to a richer valuation on this metric.

Result: OVERVALUED

P/E ratios tell one story, but what if the real opportunity lies elsewhere? Discover 1445 companies where insiders are betting big on explosive growth.

Earlier we mentioned that there is an even better way to understand valuation, so let us introduce you to Narratives, which are simply your story about Parsons, linked to your own forecast for revenue, earnings and margins, and then to a Fair Value that you can easily compare to the current share price.

On Simply Wall St’s Community page, Narratives let you input your assumptions, connect them to a financial model, and see a Fair Value that updates automatically when new information like earnings releases, contract announcements or guidance changes is added to the platform.

Because different investors can hold different views, one Parsons Narrative might lean closer to the consensus Fair Value of about US$84.64 per share using a 5.03% revenue growth rate, a 4.85% profit margin and a 30.29x future P/E. Another could assume more conservative or more optimistic numbers, giving you a clear, side by side sense of how your Parsons view compares with others and whether the current price looks high or low against your own Fair Value.

Do you think there’s more to the story for Parsons? Head over to our Community to see what others are saying!

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.

Companies discussed in this article include PSN.

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