This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll look at Olympique Lyonnais Groupe SA’s (EPA:OLG) P/E ratio and reflect on what it tells us about the company’s share price. Olympique Lyonnais Groupe has a price to earnings ratio of 20.33, based on the last twelve months. In other words, at today’s prices, investors are paying €20.33 for every €1 in prior year profit.
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 Olympique Lyonnais Groupe:
P/E of 20.33 = €2.82 ÷ €0.14 (Based on the year to June 2018.)
Is A High Price-to-Earnings 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. 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 Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. Earnings growth means that in the future the ‘E’ will be higher. 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.
Olympique Lyonnais Groupe increased earnings per share by a whopping 52% last year. And its annual EPS growth rate over 5 years is 62%. I’d therefore be a little surprised if its P/E ratio was not relatively high.
How Does Olympique Lyonnais Groupe’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. The image below shows that Olympique Lyonnais Groupe has a lower P/E than the average (24.5) P/E for companies in the entertainment industry.
Olympique Lyonnais Groupe’s P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with Olympique Lyonnais Groupe, 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.
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. Theoretically, a business can improve its earnings (and produce a lower P/E in the future), by taking on debt (or spending its remaining cash).
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 Olympique Lyonnais Groupe’s Debt Impact Its P/E Ratio?
Olympique Lyonnais Groupe has net debt worth a very significant 162% of its market capitalization. If you want to compare its P/E ratio to other companies, you must keep in mind that these debt levels would usually warrant a relatively low P/E.
The Bottom Line On Olympique Lyonnais Groupe’s P/E Ratio
Olympique Lyonnais Groupe’s P/E is 20.3 which is above average (15.1) in the FR market. While the meaningful level of debt does limit its options, it has achieved solid growth over the last year. But if growth falters, the relatively high P/E ratio may prove to be unjustified.
When the market is wrong about a stock, it gives savvy investors an opportunity. People often underestimate remarkable growth — so investors can make money when fast growth is not fully appreciated. So this free report on the analyst consensus forecasts could help you make a master move on this stock.
You might be able to find a better buy than Olympique Lyonnais Groupe. 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).
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.