Capgemini SE's (EPA:CAP) 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 Capgemini SE (EPA:CAP) as a stock to potentially avoid with its 19.9x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Recent times have been advantageous for Capgemini as its earnings have been rising faster than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Capgemini

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

How Is Capgemini's Growth Trending?

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

Retrospectively, the last year delivered an exceptional 21% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 112% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 7.9% each year during the coming three years according to the analysts following the company. That's shaping up to be materially lower than the 11% per year growth forecast for the broader market.

In light of this, it's alarming that Capgemini'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.

The Final Word

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Capgemini's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for Capgemini with six simple checks on some of these key factors.

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