Earnings Tell The Story For Lisi S.A. (EPA:FII)

When close to half the companies in France have price-to-earnings ratios (or "P/E's") below 16x, you may consider Lisi S.A. (EPA:FII) as a stock to avoid entirely with its 37.2x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

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Lisi certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

The only time you'd be truly comfortable seeing a P/E as steep as Lisi's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered a decent 13% gain to the company's bottom line. The latest three year period has also seen an excellent 53% 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.

Shifting to the future, estimates from the six analysts covering the company suggest earnings should grow by 34% per annum over the next three years. That's shaping up to be materially higher than the 13% per year growth forecast for the broader market.

In light of this, it's understandable that Lisi's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

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 Lisi maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

Before you settle on your opinion, we've discovered 2 warning signs for Lisi that you should be aware of.

If you're unsure about the strength of Lisi's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.