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What Is Mersen's (EPA:MRN) P/E Ratio After Its Share Price Rocketed?

Simply Wall St
·4 min read

Those holding Mersen (EPA:MRN) shares must be pleased that the share price has rebounded 37% in the last thirty days. But unfortunately, the stock is still down by 46% over a quarter. But shareholders may not all be feeling jubilant, since the share price is still down 45% in the last year.

Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. In the long term, share prices tend to follow earnings per share, but in the short term prices bounce around in response to short term factors (which are not always obvious). The implication here is that deep value investors might steer clear when expectations of a company are too high. Perhaps the simplest way to get a read on investors' expectations of a business is to look at its Price to Earnings Ratio (PE Ratio). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.

Check out our latest analysis for Mersen

How Does Mersen's P/E Ratio Compare To Its Peers?

We can tell from its P/E ratio of 5.83 that sentiment around Mersen isn't particularly high. The image below shows that Mersen has a lower P/E than the average (18.4) P/E for companies in the electrical industry.

ENXTPA:MRN Price Estimation Relative to Market April 18th 2020
ENXTPA:MRN Price Estimation Relative to Market April 18th 2020

This suggests that market participants think Mersen will underperform other companies in its industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. You should delve deeper. I like to check if company insiders have been buying or selling.

How Growth Rates Impact P/E Ratios

Probably the most important factor in determining what P/E a company trades on is the earnings growth. When earnings grow, the 'E' increases, over time. 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.

It's nice to see that Mersen grew EPS by a stonking 32% in the last year. And earnings per share have improved by 100% annually, over the last five years. So we'd generally expect it to have a relatively high P/E ratio.

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

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. 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).

Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).

Is Debt Impacting Mersen's P/E?

Mersen's net debt equates to 37% of its market capitalization. While that's enough to warrant consideration, it doesn't really concern us.

The Bottom Line On Mersen's P/E Ratio

Mersen has a P/E of 5.8. That's below the average in the FR market, which is 14.0. The company hasn't stretched its balance sheet, and earnings growth was good last year. If the company can continue to grow earnings, then the current P/E may be unjustifiably low. What we know for sure is that investors are becoming less uncomfortable about Mersen's prospects, since they have pushed its P/E ratio from 4.3 to 5.8 over the last month. If you like to buy stocks that could be turnaround opportunities, then this one might be a candidate; but if you're more sensitive to price, then you may feel the opportunity has passed.

When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.

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.