Investors Interested In Pernod Ricard SA's (EPA:RI) Earnings

With a price-to-earnings (or "P/E") ratio of 20.6x Pernod Ricard SA (EPA:RI) may be sending bearish signals at the moment, given that almost half of all companies in France have P/E ratios under 16x and even P/E's lower than 10x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

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While the market has experienced earnings growth lately, Pernod Ricard's earnings have gone into reverse gear, which is not great. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

See our latest analysis for Pernod Ricard

Keen to find out how analysts think Pernod Ricard's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Growth For Pernod Ricard?

The only time you'd be truly comfortable seeing a P/E as high as Pernod Ricard's is when the company's growth is on track to outshine the market.

Retrospectively, the last year delivered a frustrating 46% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 34% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the nine analysts covering the company suggest earnings should grow by 20% per year over the next three years. That's shaping up to be materially higher than the 13% per year growth forecast for the broader market.

In light of this, it's understandable that Pernod Ricard's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

As we suspected, our examination of Pernod Ricard's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

Having said that, be aware Pernod Ricard is showing 4 warning signs in our investment analysis, and 2 of those don't sit too well with us.

If you're unsure about the strength of Pernod Ricard's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.