Despite Its High P/E Ratio, Is Lagardère SCA (EPA:MMB) Still Undervalued?
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 Lagardère SCA's (EPA:MMB) P/E ratio to inform your assessment of the investment opportunity. Looking at earnings over the last twelve months, Lagardère has a P/E ratio of 14.68. That is equivalent to an earnings yield of about 6.8%.
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Check out our latest analysis for Lagardère
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Lagardère:
P/E of 14.68 = €21.96 ÷ €1.5 (Based on the year to December 2018.)
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 necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. 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.
Lagardère increased earnings per share by 9.9% last year. And earnings per share have improved by 37% annually, over the last three years. Unfortunately, earnings per share are down 32% a year, over 5 years.
Does Lagardère Have A Relatively High Or Low P/E For Its Industry?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. As you can see below, Lagardère has a higher P/E than the average company (13) in the media industry.
That means that the market expects Lagardère will outperform other companies in its industry. Clearly the market expects growth, but it isn't guaranteed. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
The 'Price' in P/E reflects the market capitalization of the company. That means it doesn't take debt or cash into account. 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.
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 Lagardère's Debt Impact Its P/E Ratio?
Lagardère has net debt equal to 48% of its market cap. While that's enough to warrant consideration, it doesn't really concern us.
The Bottom Line On Lagardère's P/E Ratio
Lagardère trades on a P/E ratio of 14.7, which is below the FR market average of 17.6. The company hasn't stretched its balance sheet, and earnings are improving. The P/E ratio implies the market is cautious about longer term prospects.
Investors have an opportunity when market expectations about a stock are wrong. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine.' 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 Lagardère. So you may wish to see this free collection of other companies that have grown earnings strongly.
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.
