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

This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll look at Marsh & McLennan Companies, Inc.’s (NYSE:MMC) P/E ratio and reflect on what it tells us about the company’s share price. Based on the last twelve months, Marsh & McLennan Companies’s P/E ratio is 28.46. That corresponds to an earnings yield of approximately 3.5%.

See our latest analysis for Marsh & McLennan Companies

How Do You Calculate Marsh & McLennan Companies’s P/E Ratio?

The formula for P/E is:

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

Or for Marsh & McLennan Companies:

P/E of 28.46 = $92.8 ÷ $3.26 (Based on the trailing twelve months to December 2018.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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 Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.

Most would be impressed by Marsh & McLennan Companies earnings growth of 12% in the last year. And it has bolstered its earnings per share by 5.8% per year over the last five years. So one might expect an above average P/E ratio.

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

The P/E ratio essentially measures market expectations of a company. As you can see below, Marsh & McLennan Companies has a higher P/E than the average company (17.2) in the insurance industry.

NYSE:MMC Price Estimation Relative to Market, February 28th 2019
NYSE:MMC Price Estimation Relative to Market, February 28th 2019

That means that the market expects Marsh & McLennan Companies will outperform other companies in its industry. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and selling.

Remember: P/E Ratios Don’t Consider The Balance Sheet

It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. In other words, it does not consider any debt or cash that the company may have on the balance sheet. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.

How Does Marsh & McLennan Companies’s Debt Impact Its P/E Ratio?

Net debt totals 10% of Marsh & McLennan Companies’s 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’s P/E is 28.5 which is above average (17.7) in the US market. The company is not overly constrained by its modest debt levels, and it is growing earnings per share. So it does not seem strange that the P/E is above average.

When the market is wrong about a stock, it gives savvy investors an opportunity. People often underestimate remarkable growth — so investors can make money when fast growth is not fully appreciated. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

But note: Marsh & McLennan Companies may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio 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.