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# Despite Its High P/E Ratio, Is AXA SA (EPA:CS) Still Undervalued?

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The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to AXA SA's (EPA:CS), to help you decide if the stock is worth further research. AXA has a P/E ratio of 30.02, based on the last twelve months. That means that at current prices, buyers pay â‚¬30.02 for every â‚¬1 in trailing yearly profits.

### How Do I Calculate AXA's Price To Earnings Ratio?

The formula for price to earnings is:

Price to Earnings Ratio = Price per Share Ã· Earnings per Share (EPS)

Or for AXA:

P/E of 30.02 = â‚¬23.66 Ã· â‚¬0.79 (Based on the trailing twelve months to December 2018.)

### Is A High P/E Ratio Good?

The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.'

### Does AXA Have A Relatively High Or Low P/E For Its Industry?

The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that AXA has a higher P/E than the average (25.5) P/E for companies in the insurance industry.

That means that the market expects AXA will outperform other companies in its industry. The market is optimistic about the future, but that doesn't guarantee future growth. So further research is always essential. I often monitor director buying and selling.

### How Growth Rates Impact P/E Ratios

Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. That means even if the current P/E is low, it will increase over time if the share price stays flat. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.

AXA's earnings per share fell by 68% in the last twelve months. And EPS is down 15% a year, over the last 5 years. This growth rate might warrant a below average P/E ratio.

### 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. So it won't reflect the advantage of cash, or disadvantage of debt. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.

While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.

### So What Does AXA's Balance Sheet Tell Us?

Net debt is 47% of AXA's market cap. While it's worth keeping this in mind, it isn't a worry.

### The Bottom Line On AXA's P/E Ratio

AXA has a P/E of 30. That's higher than the average in its market, which is 17.5. With some debt but no EPS growth last year, the market has high expectations of future profits.

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.