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Those holding Lassonde Industries (TSE:LAS.A) shares must be pleased that the share price has rebounded 34% in the last thirty days. But unfortunately, the stock is still down by 5.9% over a quarter. But shareholders may not all be feeling jubilant, since the share price is still down 16% in the last year.
All else being equal, a sharp share price increase should make a stock less attractive to potential investors. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. So some would prefer to hold off buying when there is a lot of optimism towards a stock. 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.
How Does Lassonde Industries's P/E Ratio Compare To Its Peers?
Lassonde Industries's P/E is 13.98. The image below shows that Lassonde Industries has a P/E ratio that is roughly in line with the food industry average (14.2).
That indicates that the market expects Lassonde Industries will perform roughly in line with other companies in its industry. If the company has better than average prospects, then the market might be underestimating it. Further research into factors such as insider buying and selling, could help you form your own view on whether that is likely.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.
Lassonde Industries's earnings per share grew by 9.1% in the last twelve months. And earnings per share have improved by 9.9% annually, over the last five years.
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. 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).
How Does Lassonde Industries's Debt Impact Its P/E Ratio?
Lassonde Industries has net debt equal to 25% of its market cap. While that's enough to warrant consideration, it doesn't really concern us.
The Verdict On Lassonde Industries's P/E Ratio
Lassonde Industries's P/E is 14.0 which is above average (11.6) in its market. Given the debt is only modest, and earnings are already moving in the right direction, it's not surprising that the market expects continued improvement. What is very clear is that the market has become more optimistic about Lassonde Industries over the last month, with the P/E ratio rising from 10.5 back then to 14.0 today. For those who prefer to invest with the flow of momentum, that might mean it's time to put the stock on a watchlist, or research it. But the contrarian may see it as a missed opportunity.
When the market is wrong about a stock, it gives savvy investors an opportunity. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
You might be able to find a better buy than Lassonde Industries. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.
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