This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll show how you can use Marsh & McLennan Companies, Inc.’s (NYSE:MMC) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Marsh & McLennan Companies’s P/E ratio is 33.64. That is equivalent to an earnings yield of about 3.0%.
How Do I Calculate Marsh & McLennan Companies’s Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Marsh & McLennan Companies:
P/E of 33.64 = $98.30 ÷ $2.92 (Based on the year to June 2019.)
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.
Does Marsh & McLennan Companies 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. As you can see below, Marsh & McLennan Companies has a higher P/E than the average company (15.7) in the insurance industry.
Marsh & McLennan Companies’s P/E tells us that market participants think the company will perform better than its industry peers, going forward. Clearly the market expects growth, but it isn’t guaranteed. So investors should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the ‘E’ will be lower. That means even if the current P/E is low, it will increase over time if the share price stays flat. Then, a higher P/E might scare off shareholders, pushing the share price down.
Marsh & McLennan Companies saw earnings per share decrease by 9.3% last year. But over the longer term (5 years) earnings per share have increased by 2.2%. And EPS is down 2.5% a year, over the last 3 years. So it would be surprising to see a high P/E.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
Don’t forget that the P/E ratio considers market capitalization. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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.
While growth expenditure doesn’t always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.
How Does Marsh & McLennan Companies’s Debt Impact Its P/E Ratio?
Marsh & McLennan Companies’s net debt is 24% of its market cap. It would probably deserve a higher P/E ratio if it was net cash, since it would have more options for growth.
The Bottom Line On Marsh & McLennan Companies’s P/E Ratio
Marsh & McLennan Companies’s P/E is 33.6 which is above average (17.5) in its market. With a bit of debt, but a lack of recent growth, it’s safe to say the market is expecting improved profit performance from the company, in the next few years.
Investors have an opportunity when market expectations about a stock are wrong. People often underestimate remarkable growth — so investors can make money when fast growth is not fully appreciated. So this free report on the analyst consensus forecasts could help you make a master move on this stock.
But note: Marsh & McLennan Companies may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
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 [email protected]. 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.