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Do You Know What Lindsay Australia Limited's (ASX:LAU) P/E Ratio Means?

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This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll look at Lindsay Australia Limited's (ASX:LAU) P/E ratio and reflect on what it tells us about the company's share price. Looking at earnings over the last twelve months, Lindsay Australia has a P/E ratio of 12.19. That corresponds to an earnings yield of approximately 8.2%.

See our latest analysis for Lindsay Australia

How Do You Calculate A P/E Ratio?

The formula for P/E is:

Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)

Or for Lindsay Australia:

P/E of 12.19 = A$0.35 ÷ A$0.029 (Based on the year to December 2018.)

Is A High P/E Ratio Good?

A higher P/E ratio means that buyers have to pay a higher price for each A$1 the company has earned over the last year. 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

P/E ratios primarily reflect market expectations around earnings growth rates. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means even if the current P/E is high, it will reduce over time if the share price stays flat. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

In the last year, Lindsay Australia grew EPS like Taylor Swift grew her fan base back in 2010; the 52% gain was both fast and well deserved. Having said that, if we look back three years, EPS growth has averaged a comparatively less impressive 3.0%. Unfortunately, earnings per share are down 1.3% a year, over 5 years.

Does Lindsay Australia Have A Relatively High Or Low P/E For Its Industry?

One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. If you look at the image below, you can see Lindsay Australia has a lower P/E than the average (14.5) in the transportation industry classification.

ASX:LAU Price Estimation Relative to Market, June 5th 2019

Lindsay Australia's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with Lindsay Australia, 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

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. In other words, it does not consider any debt or cash that the company may have on the balance sheet. In theory, a company can lower its future P/E ratio by using cash or debt to invest in 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.

So What Does Lindsay Australia's Balance Sheet Tell Us?

Lindsay Australia has net debt worth a very significant 107% of its market capitalization. This level of debt justifies a relatively low P/E, so remain cognizant of the debt, if you're comparing it to other stocks.

The Bottom Line On Lindsay Australia's P/E Ratio

Lindsay Australia trades on a P/E ratio of 12.2, which is below the AU market average of 16.1. The company may have significant debt, but EPS growth was good last year. If the company can continue to grow earnings, then the current P/E may be unjustifiably low.

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 report on the analyst consensus forecasts could help you make a master move on this stock.

You might be able to find a better buy than Lindsay Australia. 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).

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 editorial-team@simplywallst.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.