Is Lancaster Colony Corporation’s (NASDAQ:LANC) High P/E Ratio A Problem For Investors?
This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll look at Lancaster Colony Corporation’s (NASDAQ:LANC) P/E ratio and reflect on what it tells us about the company’s share price. Lancaster Colony has a P/E ratio of 31.69, based on the last twelve months. That means that at current prices, buyers pay $31.69 for every $1 in trailing yearly profits.
See our latest analysis for Lancaster Colony
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Lancaster Colony:
P/E of 31.69 = $167.24 ÷ $5.28 (Based on the year to September 2018.)
Is A High P/E Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each $1 of company earnings. That isn’t necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the ‘E’ will be higher. That means unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.
It’s nice to see that Lancaster Colony grew EPS by a stonking 30% in the last year. And it has bolstered its earnings per share by 6.3% per year over the last five years. So we’d generally expect it to have a relatively high P/E ratio.
How Does Lancaster Colony’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. You can see in the image below that the average P/E (18.6) for companies in the food industry is lower than Lancaster Colony’s P/E.
Lancaster Colony’s P/E tells us that market participants think the company will perform better than its industry peers, going forward. The market is optimistic about the future, but that doesn’t guarantee future growth. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
Remember: P/E Ratios Don’t Consider The Balance Sheet
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. Theoretically, a business can improve its earnings (and produce a lower P/E in the future), by taking on debt (or spending its remaining cash).
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.
Lancaster Colony’s Balance Sheet
Since Lancaster Colony holds net cash of US$218m, it can spend on growth, justifying a higher P/E ratio than otherwise.
The Bottom Line On Lancaster Colony’s P/E Ratio
Lancaster Colony trades on a P/E ratio of 31.7, which is above the US market average of 18.4. Its strong balance sheet gives the company plenty of resources for extra growth, and it has already proven it can grow. So it does not seem strange that the P/E is above average.
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 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 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.