Do You Know What H Lundbeck A/S’s (CPH:LUN) P/E Ratio Means?
This article is written for those who want to get better at using price to earnings ratios (P/E ratios). To keep it practical, we’ll show how H Lundbeck A/S’s (CPH:LUN) P/E ratio could help you assess the value on offer. H. Lundbeck has a price to earnings ratio of 15.59, based on the last twelve months. That is equivalent to an earnings yield of about 6.4%.
View our latest analysis for H. Lundbeck
How Do I Calculate H. Lundbeck’s Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for H. Lundbeck:
P/E of 15.59 = DKK285.2 ÷ DKK18.29 (Based on the trailing twelve months to June 2018.)
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. All else being equal, it’s better to pay a low price — but as Warren Buffett said, ‘It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.’
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.
It’s nice to see that H. Lundbeck grew EPS by a stonking 81% in the last year. And its annual EPS growth rate over 5 years is 25%. So we’d generally expect it to have a relatively high P/E ratio.
How Does H. Lundbeck’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. If you look at the image below, you can see H. Lundbeck has a lower P/E than the average (20.5) in the pharmaceuticals industry classification.
This suggests that market participants think H. Lundbeck 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. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
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. That means it doesn’t take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.
How Does H. Lundbeck’s Debt Impact Its P/E Ratio?
H. Lundbeck has net cash of ø4.5b. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.
The Verdict On H. Lundbeck’s P/E Ratio
H. Lundbeck trades on a P/E ratio of 15.6, which is fairly close to the DK market average of 16.3. Considering its recent growth, alongside its lack of debt, it would appear that the market isn’t very excited about the future.
Investors have an opportunity when market expectations about a stock are wrong. 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 they 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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
