EssilorLuxottica Société anonyme's (EPA:EL) Shares May Have Run Too Fast Too Soon

When close to half the companies in France have price-to-earnings ratios (or "P/E's") below 15x, you may consider EssilorLuxottica Société anonyme (EPA:EL) as a stock to avoid entirely with its 39.8x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

EssilorLuxottica 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.

See our latest analysis for EssilorLuxottica Société anonyme

If you'd like to see what analysts are forecasting going forward, you should check out our free report on EssilorLuxottica Société anonyme.

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

The only time you'd be truly comfortable seeing a P/E as steep as EssilorLuxottica Société anonyme's is when the company's growth is on track to outshine the market decidedly.

If we review the last year of earnings growth, the company posted a worthy increase of 4.9%. Pleasingly, EPS has also lifted 2,477% in aggregate from three years ago, partly thanks to the last 12 months of growth. 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 14% per annum as estimated by the analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 14% per annum, which is not materially different.

In light of this, it's curious that EssilorLuxottica 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 Bottom Line On EssilorLuxottica Société anonyme's P/E

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of EssilorLuxottica 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. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

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

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.

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