Hermès International Société en commandite par actions' (EPA:RMS) Shares Climb 25% But Its Business Is Yet to Catch Up

Hermès International Société en commandite par actions (EPA:RMS) shareholders would be excited to see that the share price has had a great month, posting a 25% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 32% in the last year.

After such a large jump in price, Hermès International Société en commandite par actions may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 55x, since almost half of all companies in France have P/E ratios under 14x and even P/E's lower than 8x 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.

Hermès International Société en commandite par actions 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.

Check out our latest analysis for Hermès International Société en commandite par actions

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Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as steep as Hermès International Société en commandite par actions' is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered an exceptional 28% gain to the company's bottom line. The latest three year period has also seen an excellent 211% overall rise in EPS, aided 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 9.5% per annum 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.

With this information, we find it concerning that Hermès International Société en commandite par actions 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.

The Bottom Line On Hermès International Société en commandite par actions' P/E

The strong share price surge has got Hermès International Société en commandite par actions' P/E rushing to great heights as well. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Hermès International Société en commandite par actions currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Hermès International Société en commandite par actions that you should be aware of.

You might be able to find a better investment than Hermès International Société en commandite par actions. 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.