Do You Know What Leon’s Furniture Limited’s (TSE:LNF) P/E Ratio Means?
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The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll show how you can use Leon’s Furniture Limited’s (TSE:LNF) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Leon’s Furniture’s P/E ratio is 10.42. In other words, at today’s prices, investors are paying CA$10.42 for every CA$1 in prior year profit.
Check out our latest analysis for Leon’s Furniture
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Leon’s Furniture:
P/E of 10.42 = CA$14.67 ÷ CA$1.41 (Based on the year to September 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each CA$1 of company earnings. That isn’t a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business’s prospects, relative to stocks with a lower P/E.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. When earnings grow, the ‘E’ increases, over time. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.
Leon’s Furniture’s earnings per share grew by -2.4% in the last twelve months. And its annual EPS growth rate over 5 years is 9.7%.
How Does Leon’s Furniture’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. If you look at the image below, you can see Leon’s Furniture has a lower P/E than the average (12.8) in the specialty retail industry classification.
This suggests that market participants think Leon’s Furniture will underperform other companies in its industry. Since the market seems unimpressed with Leon’s Furniture, it’s quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
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. 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).
Is Debt Impacting Leon’s Furniture’s P/E?
Net debt totals just 8.2% of Leon’s Furniture’s market cap. So it doesn’t have as many options as it would with net cash, but its debt would not have much of an impact on its P/E ratio.
The Verdict On Leon’s Furniture’s P/E Ratio
Leon’s Furniture’s P/E is 10.4 which is below average (14.6) in the CA market. The company does have a little debt, and EPS is moving in the right direction. The P/E ratio implies the market is cautious about longer term prospects.
Investors should be looking to buy stocks that the market is wrong about. As value investor Benjamin Graham famously said, ‘In the short run, the market is a voting machine but in the long run, it is a weighing machine.’ So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.
Of course you might be able to find a better stock than Leon’s Furniture. So you may wish to see this free collection of other companies that have grown earnings strongly.
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.
