This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll look at Compagnie Du Mont-Blanc’s (EPA:MLCMB) P/E ratio and reflect on what it tells us about the company’s share price. Compagnie Du Mont-Blanc has a P/E ratio of 13.77, based on the last twelve months. That means that at current prices, buyers pay €13.77 for every €1 in trailing yearly profits.
Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Compagnie Du Mont-Blanc:
P/E of 13.77 = €139 ÷ €10.1 (Based on the trailing twelve months to May 2018.)
Is A High P/E Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. 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
Earnings growth rates have a big influence on P/E ratios. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. That means unless the share price increases, the P/E will reduce in a few years. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.
Compagnie Du Mont-Blanc increased earnings per share by an impressive 20% over the last twelve months. And earnings per share have improved by 9.1% annually, over the last five years. This could arguably justify a relatively high P/E ratio.
How Does Compagnie Du Mont-Blanc’s P/E Ratio Compare To Its Peers?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. We can see in the image below that the average P/E (31.6) for companies in the hospitality industry is higher than Compagnie Du Mont-Blanc’s P/E.
Compagnie Du Mont-Blanc’s P/E tells us that market participants think it will not fare as well as its peers in the same industry. Many investors like to buy stocks when the market is pessimistic about their prospects. You should delve deeper. I like to check if company insiders have been buying or selling.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
The ‘Price’ in P/E reflects the market capitalization of the company. So it won’t reflect the advantage of cash, or disadvantage of debt. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on 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.
Compagnie Du Mont-Blanc’s Balance Sheet
Compagnie Du Mont-Blanc has net debt worth 59% of its market capitalization. This is enough debt that you’d have to make some adjustments before using the P/E ratio to compare it to a company with net cash.
The Verdict On Compagnie Du Mont-Blanc’s P/E Ratio
Compagnie Du Mont-Blanc’s P/E is 13.8 which is below average (17.4) in the FR market. While the EPS growth last year was strong, the significant debt levels reduce the number of options available to management. If the company can continue to grow earnings, then the current P/E may be unjustifiably low.
Investors have an opportunity when market expectations about a stock are wrong. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. We don’t have analyst forecasts, but you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.
But note: Compagnie Du Mont-Blanc 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).
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.