With a price-to-earnings (or “P/E”) ratio of 36.5x Interparfums SA (EPA:ITP) may be sending very bearish signals at the moment, given that almost half of all companies in France have P/E ratios under 15x and even P/E’s lower than 9x are not unusual. Although, it’s not wise to just take the P/E at face value as there may be an explanation why it’s so lofty.
Recent times have been advantageous for Interparfums as its earnings have been rising faster than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.free report is a great place to start.
Does Growth Match The High P/E?
There’s an inherent assumption that a company should far outperform the market for P/E ratios like Interparfums’ to be considered reasonable.
Retrospectively, the last year delivered a decent 8.5% gain to the company’s bottom line. The latest three year period has also seen an excellent 47% overall rise in EPS, aided somewhat by its short-term performance. Therefore, it’s fair to say the earnings growth recently has been superb for the company.
Looking ahead now, EPS is anticipated to slump, contracting by 1.4% per annum during the coming three years according to the six analysts following the company. With the market predicted to deliver 7.1% growth each year, that’s a disappointing outcome.
With this information, we find it concerning that Interparfums is trading at a P/E higher than the market. 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 heavily on the share price eventually.
The Final Word
While the price-to-earnings ratio shouldn’t be the defining factor in whether you buy a stock or not, it’s quite a capable barometer of earnings expectations.
We’ve established that Interparfums currently trades on a much 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 the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it’s very challenging to accept these prices as being reasonable.
You should always think about risks. Case in point, we’ve spotted 1 warning sign for Interparfums you should be aware of.
Of course, you might also be able to find a better stock than Interparfums. So you may wish to see this free collection of other companies that sit on P/E’s below 20x and have grown earnings strongly.
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