The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll show how you can use Compagnie de Saint-Gobain S.A.’s (EPA:SGO) P/E ratio to inform your assessment of the investment opportunity. Compagnie de Saint-Gobain has a P/E ratio of 42.86, based on the last twelve months. In other words, at today’s prices, investors are paying €42.86 for every €1 in prior year profit.
How Do I Calculate Compagnie de Saint-Gobain’s Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Compagnie de Saint-Gobain:
P/E of 42.86 = €32.9 ÷ €0.77 (Based on the trailing twelve months 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. 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.’
How Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. That means unless the share price increases, the P/E will reduce in a few years. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.
Compagnie de Saint-Gobain’s earnings per share fell by 73% in the last twelve months. But EPS is up 23% over the last 5 years.
How Does Compagnie de Saint-Gobain’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. The image below shows that Compagnie de Saint-Gobain has a higher P/E than the average (24.3) P/E for companies in the building industry.
Its relatively high P/E ratio indicates that Compagnie de Saint-Gobain shareholders think it will perform better than other companies in its industry classification. Clearly the market expects growth, but it isn’t guaranteed. So further research is always essential. I often monitor director buying and selling.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
The ‘Price’ in P/E reflects the market capitalization of the company. That means it doesn’t take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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.
How Does Compagnie de Saint-Gobain’s Debt Impact Its P/E Ratio?
Compagnie de Saint-Gobain’s net debt is 46% of its market cap. This is enough debt that you’d have to make some adjustments before using the P/E ratio to compare it to a company with net cash.
The Bottom Line On Compagnie de Saint-Gobain’s P/E Ratio
Compagnie de Saint-Gobain’s P/E is 42.9 which is above average (15.9) in the FR market. With modest debt but no EPS growth in the last year, it’s fair to say the P/E implies some optimism about future earnings, from the market.
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 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 firstname.lastname@example.org. 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.