Should You Be Tempted To Sell L’Air Liquide S.A. (EPA:AI) Because Of Its P/E Ratio?

Jenifer Prater

Sun, Feb 17, 2019, 12:38 AM

The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll look at L’Air Liquide S.A.’s (EPA:AI) P/E ratio and reflect on what it tells us about the company’s share price. L’Air Liquide S.A has a P/E ratio of 21.57, based on the last twelve months. That corresponds to an earnings yield of approximately 4.6%.

See our latest analysis for L’Air Liquide S.A

How Do You Calculate L’Air Liquide S.A’s P/E Ratio?

The formula for P/E is:

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

Or for L’Air Liquide S.A:

P/E of 21.57 = €106.85 ÷ €4.95 (Based on the trailing twelve months to December 2018.)

Is A High P/E Ratio Good?

A higher P/E ratio means that buyers have to pay a higher price for each €1 the company has earned over the last year. That isn’t necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. When earnings grow, the ‘E’ increases, over time. 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.

L’Air Liquide S.A shrunk earnings per share by 5.6% last year. But over the longer term (5 years) earnings per share have increased by 4.1%.

How Does L’Air Liquide S.A’s P/E Ratio Compare To Its Peers?

We can get an indication of market expectations by looking at the P/E ratio. As you can see below, L’Air Liquide S.A has a higher P/E than the average company (15.6) in the chemicals industry.

Its relatively high P/E ratio indicates that L’Air Liquide S.A shareholders think it will perform better than other companies in its industry classification. The market is optimistic about the future, but that doesn’t guarantee future growth. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits

It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. Thus, the metric does not reflect cash or debt held by the company. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.