Is Marsh & McLennan Companies, Inc.’s (NYSE:MMC) High P/E Ratio A Problem For Investors?

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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll show how you can use Marsh & McLennan Companies, Inc.’s (NYSE:MMC) P/E ratio to inform your assessment of the investment opportunity. Looking at earnings over the last twelve months, Marsh & McLennan Companies has a P/E ratio of 30.72. In other words, at today’s prices, investors are paying $30.72 for every $1 in prior year profit.

Check out our latest analysis for Marsh & McLennan Companies

How Do I Calculate Marsh & McLennan Companies’s Price To Earnings Ratio?

The formula for P/E is:

Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)

Or for Marsh & McLennan Companies:

P/E of 30.72 = $101.91 ÷ $3.32 (Based on the trailing twelve months to March 2019.)

Is A High Price-to-Earnings Ratio Good?

The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.

How Does Marsh & McLennan Companies’s P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. As you can see below, Marsh & McLennan Companies has a higher P/E than the average company (17.4) in the insurance industry.

NYSE:MMC Price Estimation Relative to Market, July 12th 2019
NYSE:MMC Price Estimation Relative to Market, July 12th 2019

Marsh & McLennan Companies’s P/E tells us that market participants think the company will perform better than its industry peers, going forward.

How Growth Rates Impact P/E Ratios

Generally speaking the rate of earnings growth has a profound impact on a company’s P/E multiple. When earnings grow, the ‘E’ increases, over time. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

Marsh & McLennan Companies increased earnings per share by 5.3% last year. And its annual EPS growth rate over 5 years is 5.5%.

Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. That means it doesn’t take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.

Marsh & McLennan Companies’s Balance Sheet

Marsh & McLennan Companies’s net debt is 23% of its market cap. That’s enough debt to impact the P/E ratio a little; so keep it in mind if you’re comparing it to companies without debt.

The Verdict On Marsh & McLennan Companies’s P/E Ratio

Marsh & McLennan Companies trades on a P/E ratio of 30.7, which is above its market average of 17.9. With modest debt relative to its size, and modest earnings growth, the market is likely expecting sustained long-term growth, if not a near-term improvement.

Investors should be looking to buy stocks that the market is wrong about. People often underestimate remarkable growth — so investors can make money when fast growth is not fully appreciated. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E 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 editorial-team@simplywallst.com. 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.