Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll show how you can use Société Fermière du Casino Municipal de Cannes's (EPA:FCMC) P/E ratio to inform your assessment of the investment opportunity. What is Société Fermière du Casino Municipal de Cannes's P/E ratio? Well, based on the last twelve months it is 19.23. That corresponds to an earnings yield of approximately 5.2%.
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Société Fermière du Casino Municipal de Cannes:
P/E of 19.23 = €1700.00 ÷ €88.40 (Based on the trailing twelve months to April 2019.)
Is A High Price-to-Earnings Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
How Does Société Fermière du Casino Municipal de Cannes's P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. If you look at the image below, you can see Société Fermière du Casino Municipal de Cannes has a lower P/E than the average (24.8) in the hospitality industry classification.
This suggests that market participants think Société Fermière du Casino Municipal de Cannes will underperform other companies in its industry. Since the market seems unimpressed with Société Fermière du Casino Municipal de Cannes, it's quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, 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. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
Société Fermière du Casino Municipal de Cannes saw earnings per share decrease by 20% last year. But over the longer term (5 years) earnings per share have increased by 12%.
Remember: P/E Ratios Don't Consider The Balance Sheet
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. 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.
Is Debt Impacting Société Fermière du Casino Municipal de Cannes's P/E?
Since Société Fermière du Casino Municipal de Cannes holds net cash of €26m, it can spend on growth, justifying a higher P/E ratio than otherwise.
The Bottom Line On Société Fermière du Casino Municipal de Cannes's P/E Ratio
Société Fermière du Casino Municipal de Cannes's P/E is 19.2 which is above average (17.7) in its market. Falling earnings per share is probably keeping traditional value investors away, but the net cash position means the company has time to improve: and the high P/E suggests the market thinks it will.
Investors have an opportunity when market expectations about a stock are wrong. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. Although we don't have analyst forecasts you might want to assess this data-rich visualization of earnings, revenue and cash flow.
You might be able to find a better buy than Société Fermière du Casino Municipal de Cannes. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
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.
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.