Some Shareholders Feeling Restless Over Compagnie de Saint-Gobain S.A.'s (EPA:SGO) P/E Ratio

It's not a stretch to say that Compagnie de Saint-Gobain S.A.'s (EPA:SGO) price-to-earnings (or "P/E") ratio of 14.2x right now seems quite "middle-of-the-road" compared to the market in France, where the median P/E ratio is around 14x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Compagnie de Saint-Gobain has been doing quite well of late. One possibility is that the P/E is moderate because investors think the company's earnings will be less resilient moving forward. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

Check out our latest analysis for Compagnie de Saint-Gobain

Want the full picture on analyst estimates for the company? Then our free report on Compagnie de Saint-Gobain will help you uncover what's on the horizon.

Does Growth Match The P/E?

In order to justify its P/E ratio, Compagnie de Saint-Gobain would need to produce growth that's similar to the market.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 7.1% last year. The latest three year period has also seen an excellent 40% overall rise in EPS, aided somewhat by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 6.2% each year as estimated by the analysts watching the company. That's shaping up to be materially lower than the 14% each year growth forecast for the broader market.

With this information, we find it interesting that Compagnie de Saint-Gobain is trading at a fairly similar P/E to the market. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

What We Can Learn From Compagnie de Saint-Gobain's P/E?

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Compagnie de Saint-Gobain currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Compagnie de Saint-Gobain that you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.