Subdued Growth No Barrier To LVMH Moët Hennessy - Louis Vuitton, Société Européenne's (EPA:MC) Price

With a price-to-earnings (or "P/E") ratio of 22.8x LVMH Moët Hennessy - Louis Vuitton, Société Européenne (EPA:MC) may be sending very bearish signals at the moment, given that almost half of all companies in France have P/E ratios under 13x and even P/E's lower than 7x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Recent times haven't been advantageous for LVMH Moët Hennessy - Louis Vuitton Société Européenne as its earnings have been falling quicker than most other companies. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

If you'd like to see what analysts are forecasting going forward, you should check out our free report on LVMH Moët Hennessy - Louis Vuitton Société Européenne.

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

In order to justify its P/E ratio, LVMH Moët Hennessy - Louis Vuitton Société Européenne would need to produce outstanding growth well in excess of the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 13%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 49% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 9.0% per annum as estimated by the analysts watching the company. That's shaping up to be materially lower than the 14% per year growth forecast for the broader market.

With this information, we find it concerning that LVMH Moët Hennessy - Louis Vuitton Société Européenne is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. 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.

What We Can Learn From LVMH Moët Hennessy - Louis Vuitton Société Européenne's P/E?

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a 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. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with LVMH Moët Hennessy - Louis Vuitton Société Européenne, and understanding should be part of your investment process.

You might be able to find a better investment than LVMH Moët Hennessy - Louis Vuitton Société Européenne. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.