Here’s How P/E Ratios Can Help Us Understand Séché Environnement SA (EPA:SCHP)

This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll look at Séché Environnement SA’s (EPA:SCHP) P/E ratio and reflect on what it tells us about the company’s share price. Based on the last twelve months, Séché Environnement’s P/E ratio is 11.2. That is equivalent to an earnings yield of about 8.9%.

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How Do I Calculate A Price To Earnings Ratio?

The formula for P/E is:

Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)

Or for Séché Environnement:

P/E of 11.2 = €30 ÷ €2.68 (Based on the trailing twelve months to June 2018.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio implies that investors pay a higher price for the earning power of the business. All else being equal, it’s better to pay a low price — but as Warren Buffett said, ‘It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.’

How Growth Rates Impact P/E Ratios

When earnings fall, the ‘E’ decreases, over time. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.

It’s nice to see that Séché Environnement grew EPS by a stonking 256% in the last year. And earnings per share have improved by 44% annually, over the last five years. With that performance, I would expect it to have an above average P/E ratio. But earnings per share are down 1.3% per year over the last three years.

How Does Séché Environnement’s P/E Ratio Compare To Its Peers?

We can get an indication of market expectations by looking at the P/E ratio. If you look at the image below, you can see Séché Environnement has a lower P/E than the average (13.5) in the commercial services industry classification.

ENXTPA:SCHP PE PEG Gauge January 21st 19
ENXTPA:SCHP PE PEG Gauge January 21st 19

This suggests that market participants think Séché Environnement will underperform other companies in its industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. You should delve deeper. I like to check if company insiders have been buying or selling.

Remember: P/E Ratios Don’t Consider The Balance Sheet

The ‘Price’ in P/E reflects the market capitalization of the company. Thus, the metric does not reflect cash or debt held by the company. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.

How Does Séché Environnement’s Debt Impact Its P/E Ratio?

Séché Environnement’s net debt is considerable, at 150% of its market cap. This is a relatively high level of debt, so the stock probably deserves a relatively low P/E ratio. Keep that in mind when comparing it to other companies.

The Bottom Line On Séché Environnement’s P/E Ratio

Séché Environnement trades on a P/E ratio of 11.2, which is below the FR market average of 14.9. The company has a meaningful amount of debt on the balance sheet, but that should not eclipse the solid earnings growth. If it continues to grow, then the current low P/E may prove to be unjustified.

When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

But note: Séché Environnement may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.