Yahoo Finance A Sliding Share Price Has Us Looking At EssilorLuxottica Société anonyme's (EPA:EL) P/E Ratio
Unfortunately for some shareholders, the EssilorLuxottica Société anonyme (EPA:EL) share price has dived 31% in the last thirty days. Even longer term holders have taken a real hit with the stock declining 8.8% in the last year.
Assuming nothing else has changed, a lower share price makes a stock more attractive to potential buyers. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. The implication here is that long term investors have an opportunity when expectations of a company are too low. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). A high P/E implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.
Check out our latest analysis for EssilorLuxottica Société anonyme
Does EssilorLuxottica Société anonyme Have A Relatively High Or Low P/E For Its Industry?
EssilorLuxottica Société anonyme's P/E of 38.65 indicates some degree of optimism towards the stock. The image below shows that EssilorLuxottica Société anonyme has a higher P/E than the average (21.3) P/E for companies in the luxury industry.
That means that the market expects EssilorLuxottica Société anonyme will outperform other companies in its industry. Clearly the market expects growth, but it isn't guaranteed. So further research is always essential. I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. That means unless the share price falls, the P/E will increase in a few years. Then, a higher P/E might scare off shareholders, pushing the share price down.
EssilorLuxottica Société anonyme shrunk earnings per share by 40% over the last year. And EPS is down 11% a year, over the last 5 years. This growth rate might warrant a below average 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. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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).
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).
Is Debt Impacting EssilorLuxottica Société anonyme's P/E?
EssilorLuxottica Société anonyme has net debt worth just 5.6% of its market capitalization. So it doesn't have as many options as it would with net cash, but its debt would not have much of an impact on its P/E ratio.
The Verdict On EssilorLuxottica Société anonyme's P/E Ratio
EssilorLuxottica Société anonyme's P/E is 38.7 which is above average (13.2) in its 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. What can be absolutely certain is that the market has become significantly less optimistic about EssilorLuxottica Société anonyme over the last month, with the P/E ratio falling from 56.2 back then to 38.7 today. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for a contrarian, it may signal opportunity.
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. So this free report on the analyst consensus forecasts could help you make a master move on this stock.
But note: EssilorLuxottica Société anonyme may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
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.
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.
