Here's What Compagnie Plastic Omnium SA's (EPA:POM) P/E Ratio Is Telling Us
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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 Compagnie Plastic Omnium SA's (EPA:POM) P/E ratio to inform your assessment of the investment opportunity. Compagnie Plastic Omnium has a P/E ratio of 5.9, based on the last twelve months. That is equivalent to an earnings yield of about 17%.
See our latest analysis for Compagnie Plastic Omnium
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Compagnie Plastic Omnium:
P/E of 5.9 = €21.34 ÷ €3.62 (Based on the trailing twelve months to December 2018.)
Is A High P/E Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each €1 the company has earned over the last year. 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
Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. Earnings growth means that in the future the 'E' will be higher. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Notably, Compagnie Plastic Omnium grew EPS by a whopping 32% in the last year. And earnings per share have improved by 22% annually, over the last five years. I'd therefore be a little surprised if its P/E ratio was not relatively high.
Does Compagnie Plastic Omnium Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company. We can see in the image below that the average P/E (6.9) for companies in the auto components industry is higher than Compagnie Plastic Omnium's P/E.
Compagnie Plastic Omnium's P/E tells us that market participants think it will not fare as well as its peers in the same industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
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. 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 Compagnie Plastic Omnium's Debt Impact Its P/E Ratio?
Compagnie Plastic Omnium has net debt equal to 25% of its market cap. While that's enough to warrant consideration, it doesn't really concern us.
The Bottom Line On Compagnie Plastic Omnium's P/E Ratio
Compagnie Plastic Omnium has a P/E of 5.9. That's below the average in the FR market, which is 17.1. The company hasn't stretched its balance sheet, and earnings growth was good last year. If it continues to grow, then the current low P/E may prove to be unjustified.
When the market is wrong about a stock, it gives savvy investors an opportunity. 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 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.
