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A Sliding Share Price Has Us Looking At Leggett & Platt, Incorporated's (NYSE:LEG) P/E Ratio

Simply Wall St
·4 mins read

Unfortunately for some shareholders, the Leggett & Platt (NYSE:LEG) share price has dived 31% in the last thirty days. The recent drop has obliterated the annual return, with the share price now down 26% over that longer period.

All else being equal, a share price drop should make a stock more attractive to potential investors. In the long term, share prices tend to follow earnings per share, but in the short term prices bounce around in response to short term factors (which are not always obvious). So, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.

View our latest analysis for Leggett & Platt

How Does Leggett & Platt's P/E Ratio Compare To Its Peers?

Leggett & Platt's P/E of 12.78 indicates some degree of optimism towards the stock. The image below shows that Leggett & Platt has a higher P/E than the average (8.3) P/E for companies in the consumer durables industry.

NYSE:LEG Price Estimation Relative to Market, March 13th 2020
NYSE:LEG Price Estimation Relative to Market, March 13th 2020

Its relatively high P/E ratio indicates that Leggett & Platt shareholders think it will perform better than other companies in its industry classification. Clearly the market expects growth, but it isn't guaranteed. So investors should delve deeper. I like to check if company insiders have been buying or selling.

How Growth Rates Impact P/E Ratios

If earnings fall then in the future the 'E' will be lower. That means unless the share price falls, the P/E will increase in a few years. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.

Leggett & Platt's earnings per share grew by -8.7% in the last twelve months. And its annual EPS growth rate over 5 years is 9.5%. But earnings per share are down 2.3% per year over the last three years.

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. 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 investing in growth. That means taking on debt (or spending its cash).

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 Leggett & Platt's Balance Sheet Tell Us?

Leggett & Platt's net debt equates to 47% of its market capitalization. You'd want to be aware of this fact, but it doesn't bother us.

The Verdict On Leggett & Platt's P/E Ratio

Leggett & Platt trades on a P/E ratio of 12.8, which is fairly close to the US market average of 13.3. When you consider the modest EPS growth last year (along with some debt), it seems the market thinks the growth is sustainable. Given Leggett & Platt's P/E ratio has declined from 18.6 to 12.8 in the last month, we know for sure that the market is significantly less confident about the business today, than it was back then. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for a contrarian, it may signal opportunity.

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 the key to an excellent investment decision.

Of course you might be able to find a better stock than Leggett & Platt. So you may wish to see this free collection of other companies that have grown earnings strongly.

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.

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. Thank you for reading.