Despite Its High P/E Ratio, Is AXA SA (EPA:CS) Still Undervalued?

Simply Wall St

Sun, Jul 14, 2019, 10:40 PM

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 AXA SA's (EPA:CS), to help you decide if the stock is worth further research. AXA has a P/E ratio of 30.02, based on the last twelve months. That means that at current prices, buyers pay €30.02 for every €1 in trailing yearly profits.

View our latest analysis for AXA

How Do I Calculate AXA's Price To Earnings Ratio?

The formula for price to earnings is:

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

Or for AXA:

P/E of 30.02 = €23.66 ÷ €0.79 (Based on the trailing twelve months to December 2018.)

Is A High P/E Ratio Good?

The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.'

Does AXA Have A Relatively High Or Low P/E For Its Industry?

The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that AXA has a higher P/E than the average (25.5) P/E for companies in the insurance industry.

ENXTPA:CS Price Estimation Relative to Market, July 15th 2019

That means that the market expects AXA will outperform other companies in its industry. The market is optimistic about the future, but that doesn't guarantee future growth. 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 even if the current P/E is low, it will increase over time if the share price stays flat. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.

AXA's earnings per share fell by 68% in the last twelve months. And EPS is down 15% 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

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. So it won't reflect the advantage of cash, or disadvantage of debt. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.