LVMH Moët Hennessy - Louis Vuitton, Société Européenne's (EPA:MC) 25% Share Price Surge Not Quite Adding Up

LVMH Moët Hennessy - Louis Vuitton, Société Européenne (EPA:MC) shareholders would be excited to see that the share price has had a great month, posting a 25% gain and recovering from prior weakness. Notwithstanding the latest gain, the annual share price return of 3.9% isn't as impressive.

After such a large jump in price, LVMH Moët Hennessy - Louis Vuitton Société Européenne's price-to-earnings (or "P/E") ratio of 27.7x might make it look like a strong sell right now compared to the market in France, where around half of the companies have P/E ratios below 14x and even P/E's below 8x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

LVMH Moët Hennessy - Louis Vuitton Société Européenne certainly has been doing a good job lately as it's been growing earnings more than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for LVMH Moët Hennessy - Louis Vuitton Société Européenne

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Is There Enough Growth For LVMH Moët Hennessy - Louis Vuitton Société Européenne?

The only time you'd be truly comfortable seeing a P/E as steep as LVMH Moët Hennessy - Louis Vuitton Société Européenne's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered a decent 8.2% gain to the company's bottom line. The latest three year period has also seen an excellent 225% 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.

Turning to the outlook, the next three years should generate growth of 8.6% each year as estimated by the analysts watching the company. With the market predicted to deliver 13% growth per year, the company is positioned for a weaker earnings result.

In light of this, it's alarming that LVMH Moët Hennessy - Louis Vuitton Société Européenne's P/E sits above the majority of other companies. 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. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Bottom Line On LVMH Moët Hennessy - Louis Vuitton Société Européenne's P/E

Shares in LVMH Moët Hennessy - Louis Vuitton Société Européenne have built up some good momentum lately, which has really inflated its P/E. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that LVMH Moët Hennessy - Louis Vuitton Société Européenne currently trades on a much 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 high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for LVMH Moët Hennessy - Louis Vuitton Société Européenne with six simple checks will allow you to discover any risks that could be an issue.

If these risks are making you reconsider your opinion on LVMH Moët Hennessy - Louis Vuitton Société Européenne, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.