Compagnie de Chemins de Fer Départementaux Société Anonyme's (EPA:MLCFD) Share Price Could Signal Some Risk

With a price-to-earnings (or "P/E") ratio of 23.7x Compagnie de Chemins de Fer Départementaux Société Anonyme (EPA:MLCFD) may be sending very bearish signals at the moment, given that almost half of all companies in France have P/E ratios under 14x and even P/E's lower than 8x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Recent times have been quite advantageous for Compagnie de Chemins de Fer Départementaux Société Anonyme as its earnings have been rising very briskly. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Compagnie de Chemins de Fer Départementaux Société Anonyme

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Compagnie de Chemins de Fer Départementaux Société Anonyme will help you shine a light on its historical performance.

Does Growth Match The High P/E?

Compagnie de Chemins de Fer Départementaux Société Anonyme's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 122% last year. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 16% shows it's noticeably less attractive on an annualised basis.

In light of this, it's alarming that Compagnie de Chemins de Fer Départementaux Société Anonyme's P/E sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

What We Can Learn From Compagnie de Chemins de Fer Départementaux Société Anonyme's P/E?

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Compagnie de Chemins de Fer Départementaux Société Anonyme currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Compagnie de Chemins de Fer Départementaux Société Anonyme you should know about.

If you're unsure about the strength of Compagnie de Chemins de Fer Départementaux Société Anonyme'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.