L'Oréal S.A.'s (EPA:OR) Business Is Yet to Catch Up With Its Share Price

L'Oréal S.A.'s (EPA:OR) price-to-earnings (or "P/E") ratio of 28x might make it look like a strong sell right now compared to the market in France, where around half of the companies have P/E ratios below 13x and even P/E's below 8x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

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Recent earnings growth for L'Oréal has been in line with the market. It might be that many expect the mediocre earnings performance to strengthen positively, which has kept the P/E from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

View our latest analysis for L'Oréal

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

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

In order to justify its P/E ratio, L'Oréal would need to produce outstanding growth well in excess of the market.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 3.8% last year. This was backed up an excellent period prior to see EPS up by 45% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 8.2% each year during the coming three years according to the analysts following the company. That's shaping up to be materially lower than the 12% per annum growth forecast for the broader market.

With this information, we find it concerning that L'Oréal 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. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Final Word

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 L'Oréal 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.

Many other vital risk factors can be found on the company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for L'Oréal with six simple checks.

Of course, you might also be able to find a better stock than L'Oréal. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.