Yahoo Finance Why Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco's (EPA:BAIN) High P/E Ratio Isn't Necessarily A Bad Thing
This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll show how you can use Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco's (EPA:BAIN) P/E ratio to inform your assessment of the investment opportunity. What is Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco's P/E ratio? Well, based on the last twelve months it is 63.89. That is equivalent to an earnings yield of about 1.6%.
View our latest analysis for Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco:
P/E of 63.89 = EUR65.60 ÷ EUR1.03 (Based on the trailing twelve months to September 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 Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco's P/E Ratio Compare To Its Peers?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. The image below shows that Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco has a higher P/E than the average (27.1) P/E for companies in the hospitality industry.
That means that the market expects Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco will outperform other companies in its industry. Clearly the market expects growth, but it isn't guaranteed. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. 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. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco's 165% EPS improvement over the last year was like bamboo growth after rain; rapid and impressive. Regrettably, the longer term performance is poor, with EPS down 13% per year over 5 years.
Remember: P/E Ratios Don't Consider The Balance Sheet
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).
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.
So What Does Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco's Balance Sheet Tell Us?
Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco's net debt is 7.6% 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 Bottom Line On Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco's P/E Ratio
Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco's P/E is 63.9 which suggests the market is more focussed on the future opportunity rather than the current level of earnings. Its debt levels do not imperil its balance sheet and its EPS growth is very healthy indeed. So on this analysis a high P/E ratio seems reasonable.
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. We don't have analyst forecasts, but shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.
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.
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.
