This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll show how you can use Landstar System, Inc.'s (NASDAQ:LSTR) P/E ratio to inform your assessment of the investment opportunity. What is Landstar System's P/E ratio? Well, based on the last twelve months it is 17.05. That is equivalent to an earnings yield of about 5.9%.
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Landstar System:
P/E of 17.05 = $109.53 ÷ $6.42 (Based on the trailing twelve months to June 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each $1 the company has earned over the last year. 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.
Does Landstar System Have A Relatively High Or Low P/E For Its Industry?
We can get an indication of market expectations by looking at the P/E ratio. As you can see below Landstar System has a P/E ratio that is fairly close for the average for the transportation industry, which is 16.9.
Landstar System's P/E tells us that market participants think its prospects are roughly in line with its industry. So if Landstar System actually outperforms its peers going forward, that should be a positive for the share price. Checking factors such as director buying and selling. could help you form your own view on if that will happen.
How Growth Rates Impact P/E Ratios
Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. And in that case, the P/E ratio itself will drop rather quickly. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
It's great to see that Landstar System grew EPS by 18% in the last year. And earnings per share have improved by 20% annually, over the last five years. So one might expect an above average P/E ratio.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don't forget that the P/E ratio considers market capitalization. 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.
Landstar System's Balance Sheet
Landstar System has net cash of US$242m. 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 Landstar System's P/E Ratio
Landstar System has a P/E of 17.1. That's around the same as the average in the US market, which is 17.6. The balance sheet is healthy, and recent EPS growth impressive, but the P/E implies some caution from the market.
When the market is wrong about a stock, it gives savvy investors an opportunity. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. 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.
You might be able to find a better buy than Landstar System. 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 firstname.lastname@example.org. 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.