La Française des Jeux Société anonyme (EPA:FDJ) Investors Are Less Pessimistic Than Expected

La Française des Jeux Société anonyme's (EPA:FDJ) price-to-earnings (or "P/E") ratio of 19.2x might make it look like a sell right now compared to the market in France, where around half of the companies have P/E ratios below 15x and even P/E's below 8x are quite common. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

La Française des Jeux Société anonyme certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

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What Are Growth Metrics Telling Us About The High P/E?

The only time you'd be truly comfortable seeing a P/E as high as La Française des Jeux Société anonyme's is when the company's growth is on track to outshine the market.

Retrospectively, the last year delivered a decent 7.0% gain to the company's bottom line. The latest three year period has also seen an excellent 278% 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.

Looking ahead now, EPS is anticipated to climb by 11% per year during the coming three years according to the ten analysts following the company. Meanwhile, the rest of the market is forecast to expand by 11% per year, which is not materially different.

In light of this, it's curious that La Française des Jeux Société anonyme's P/E sits above the majority of other companies. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

The Key Takeaway

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.

Our examination of La Française des Jeux Société anonyme's analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for La Française des Jeux Société anonyme that you should be aware of.

If you're unsure about the strength of La Française des Jeux Société anonyme's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.