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 LVMH Moët Hennessy - Louis Vuitton, Société Européenne's (EPA:MC) P/E ratio to inform your assessment of the investment opportunity. LVMH Moët Hennessy - Louis Vuitton Société Européenne has a price to earnings ratio of 29.41, based on the last twelve months. That is equivalent to an earnings yield of about 3.4%.
How Do You Calculate LVMH Moët Hennessy - Louis Vuitton Société Européenne's P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for LVMH Moët Hennessy - Louis Vuitton Société Européenne:
P/E of 29.41 = EUR419.05 ÷ EUR14.25 (Based on the trailing twelve months to December 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each EUR1 of company 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 LVMH Moët Hennessy - Louis Vuitton Société Européenne's P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. You can see in the image below that the average P/E (28.4) for companies in the luxury industry is roughly the same as LVMH Moët Hennessy - Louis Vuitton Société Européenne's P/E.
LVMH Moët Hennessy - Louis Vuitton Société Européenne's P/E tells us that market participants think its prospects are roughly in line with its industry. The company could surprise by performing better than average, in the future. Further research into factors such as insider buying and selling, could help you form your own view on whether that is likely.
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. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. 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.
Most would be impressed by LVMH Moët Hennessy - Louis Vuitton Société Européenne earnings growth of 13% in the last year. And earnings per share have improved by 4.8% annually, over the last five years. This could arguably justify a relatively high P/E ratio.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
Don't forget that the P/E ratio considers market capitalization. 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 investing in growth. That means taking on debt (or spending its cash).
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 LVMH Moët Hennessy - Louis Vuitton Société Européenne's P/E?
LVMH Moët Hennessy - Louis Vuitton Société Européenne's net debt is 3.1% of its market cap. The market might award it a higher P/E ratio if it had net cash, but its unlikely this low level of net borrowing is having a big impact on the P/E multiple.
The Verdict On LVMH Moët Hennessy - Louis Vuitton Société Européenne's P/E Ratio
LVMH Moët Hennessy - Louis Vuitton Société Européenne's P/E is 29.4 which is above average (18.7) in its market. The company is not overly constrained by its modest debt levels, and its recent EPS growth very solid. So on this analysis it seems reasonable that its P/E ratio is above average.
Investors should be looking to buy stocks that the market is wrong about. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. 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.
You might be able to find a better buy than LVMH Moët Hennessy - Louis Vuitton Société Européenne. 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.