Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll show how you can use Chocoladefabriken Lindt & Sprüngli AG's (VTX:LISN) P/E ratio to inform your assessment of the investment opportunity. Chocoladefabriken Lindt & Sprüngli has a P/E ratio of 38.99, based on the last twelve months. That means that at current prices, buyers pay CHF38.99 for every CHF1 in trailing yearly profits.
How Do You Calculate Chocoladefabriken Lindt & Sprüngli's P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Chocoladefabriken Lindt & Sprüngli:
P/E of 38.99 = CHF79600 ÷ CHF2041.35 (Based on the trailing twelve months to June 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
How Does Chocoladefabriken Lindt & Sprüngli'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, Chocoladefabriken Lindt & Sprüngli has a higher P/E than the average company (23.9) in the food industry.
That means that the market expects Chocoladefabriken Lindt & Sprüngli will outperform other companies in its industry. Clearly the market expects growth, but it isn't guaranteed. So further research is always essential. I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the 'E' increases, over time. That means unless the share price increases, the P/E will reduce in a few years. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Chocoladefabriken Lindt & Sprüngli's earnings per share grew by -6.2% in the last twelve months. And it has bolstered its earnings per share by 8.5% per year over the last five years.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
The 'Price' in P/E reflects the market capitalization of the company. That means it doesn't take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
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).
So What Does Chocoladefabriken Lindt & Sprüngli's Balance Sheet Tell Us?
Net debt totals just 1.5% of Chocoladefabriken Lindt & Sprüngli's market cap. The market might award it a higher P/E ratio if it had net cash, but its unlikely this low level of net borrowing is having a big impact on the P/E multiple.
The Verdict On Chocoladefabriken Lindt & Sprüngli's P/E Ratio
Chocoladefabriken Lindt & Sprüngli trades on a P/E ratio of 39, which is above its market average of 17.8. With modest debt relative to its size, and modest earnings growth, the market is likely expecting sustained long-term growth, if not a near-term improvement.
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: Chocoladefabriken Lindt & Sprüngli 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@example.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. Thank you for reading.