Unpleasant Surprises Could Be In Store For Rémy Cointreau SA's (EPA:RCO) Shares

With a price-to-earnings (or "P/E") ratio of 17.7x Rémy Cointreau SA (EPA:RCO) may be sending bearish signals at the moment, given that almost half of all companies in France have P/E ratios under 14x and even P/E's lower than 8x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

Recent times haven't been advantageous for Rémy Cointreau 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. If not, then existing shareholders may be very nervous about the viability of the share price.

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Is There Enough Growth For Rémy Cointreau?

There's an inherent assumption that a company should outperform the market for P/E ratios like Rémy Cointreau's to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 37%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 26% overall rise in EPS. So we can start by confirming that the company has generally done a good job of growing earnings over that time, even though it had some hiccups along the way.

Looking ahead now, EPS is anticipated to climb by 6.8% each year during the coming three years according to the analysts following the company. That's shaping up to be materially lower than the 14% per year growth forecast for the broader market.

In light of this, it's alarming that Rémy Cointreau'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.

What We Can Learn From Rémy Cointreau's 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 Rémy Cointreau 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. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Having said that, be aware Rémy Cointreau is showing 1 warning sign in our investment analysis, you should know about.

If these risks are making you reconsider your opinion on Rémy Cointreau, 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.