Here's What CFM Indosuez Wealth Société anonyme's (EPA:MLCFM) P/E Is Telling Us

Simply Wall St

Mon, Jun 24, 2019, 3:30 AM

The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to CFM Indosuez Wealth Société anonyme's (EPA:MLCFM), to help you decide if the stock is worth further research. Based on the last twelve months, CFM Indosuez Wealth Société anonyme's P/E ratio is 19.71. That means that at current prices, buyers pay €19.71 for every €1 in trailing yearly profits.

See our latest analysis for CFM Indosuez Wealth Société anonyme

How Do I Calculate A Price To Earnings Ratio?

The formula for P/E is:

Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)

Or for CFM Indosuez Wealth Société anonyme:

P/E of 19.71 = €1000 ÷ €50.74 (Based on the trailing twelve months to December 2018.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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

If earnings fall then in the future the 'E' will be lower. That means unless the share price falls, the P/E will increase in a few years. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.

CFM Indosuez Wealth Société anonyme saw earnings per share decrease by 35% last year. And it has shrunk its earnings per share by 3.7% per year over the last five years. This could justify a pessimistic P/E.

Does CFM Indosuez Wealth Société anonyme Have A Relatively High Or Low P/E For Its Industry?

We can get an indication of market expectations by looking at the P/E ratio. The image below shows that CFM Indosuez Wealth Société anonyme has a higher P/E than the average (7.7) P/E for companies in the banks industry.

ENXTPA:MLCFM Price Estimation Relative to Market, June 24th 2019

That means that the market expects CFM Indosuez Wealth Société anonyme will outperform other companies in its industry. Shareholders are clearly optimistic, but the future is always uncertain. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

Don't forget that the P/E ratio considers market capitalization. So it won't reflect the advantage of cash, or disadvantage of debt. 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.

How Does CFM Indosuez Wealth Société anonyme's Debt Impact Its P/E Ratio?

With net cash of €280m, CFM Indosuez Wealth Société anonyme has a very strong balance sheet, which may be important for its business. Having said that, at 49% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.

The Verdict On CFM Indosuez Wealth Société anonyme's P/E Ratio

CFM Indosuez Wealth Société anonyme has a P/E of 19.7. That's higher than the average in the FR market, which is 17.9. The recent drop in earnings per share would make some investors cautious, but the relatively strong balance sheet will allow the company time to invest in growth. Clearly, the high P/E indicates shareholders think it will!

When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. We don't have analyst forecasts, but you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.

You might be able to find a better buy than CFM Indosuez Wealth Société anonyme. 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).

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.

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. Thank you for reading.

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