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# Despite Its High P/E Ratio, Is Rémy Cointreau SA (EPA:RCO) Still Undervalued?

Simply Wall St

This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to Rémy Cointreau SA's (EPA:RCO), to help you decide if the stock is worth further research. Looking at earnings over the last twelve months, Rémy Cointreau has a P/E ratio of 32.68. In other words, at today's prices, investors are paying €32.68 for every €1 in prior year profit.

See our latest analysis for Rémy Cointreau

### How Do You Calculate A P/E Ratio?

The formula for P/E is:

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

Or for Rémy Cointreau:

P/E of 32.68 = €102.000 ÷ €3.121 (Based on the trailing twelve months to September 2019.)

(Note: the above calculation results may not be precise due to rounding.)

### Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each €1 of company earnings. That isn't a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business's prospects, relative to stocks with a lower P/E.

### How Does Rémy Cointreau's P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. You can see in the image below that the average P/E (23.6) for companies in the beverage industry is lower than Rémy Cointreau's P/E.

Its relatively high P/E ratio indicates that Rémy Cointreau shareholders think it will perform better than other companies in its industry classification. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and selling.

### 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. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

Rémy Cointreau's earnings per share grew by 6.5% in the last twelve months. And earnings per share have improved by 22% annually, over the last five years.

### 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.

Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).

### How Does Rémy Cointreau's Debt Impact Its P/E Ratio?

Net debt totals just 8.5% of Rémy Cointreau's market cap. It would probably trade on a higher P/E ratio if it had a lot of cash, but I doubt it is having a big impact.

### The Verdict On Rémy Cointreau's P/E Ratio

Rémy Cointreau has a P/E of 32.7. That's higher than the average in its market, which is 13.1. With debt at prudent levels and improving earnings, it's fair to say the market expects steady progress in the future.

Investors should be looking to buy stocks that the market is wrong about. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.

Of course you might be able to find a better stock than Rémy Cointreau. So you may wish to see this free collection of other companies that have grown earnings strongly.

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.

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. Thank you for reading.