Why Leifheit Aktiengesellschaft’s (FRA:LEI) High P/E Ratio Isn’t Necessarily A Bad Thing
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 Leifheit Aktiengesellschaft’s (FRA:LEI) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Leifheit’s P/E ratio is 15.13. That is equivalent to an earnings yield of about 6.6%.
Check out our latest analysis for Leifheit
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 Leifheit:
P/E of 15.13 = €17.44 ÷ €1.15 (Based on the year to September 2018.)
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. 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
Companies that shrink earnings per share quickly will rapidly decrease the ‘E’ in the equation. That means unless the share price falls, the P/E will increase in a few years. Then, a higher P/E might scare off shareholders, pushing the share price down.
Leifheit’s earnings per share fell by 6.2% in the last twelve months. And over the longer term (3 years) earnings per share have decreased 7.8% annually. So you wouldn’t expect a very high P/E.
How Does Leifheit’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. You can see in the image below that the average P/E (9.9) for companies in the consumer durables industry is lower than Leifheit’s P/E.
That means that the market expects Leifheit will outperform other companies in its industry. The market is optimistic about the future, but that doesn’t guarantee future growth. So investors should delve deeper. I like to check if company insiders have been buying or selling.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. Thus, the metric does not reflect cash or debt held by the company. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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).
How Does Leifheit’s Debt Impact Its P/E Ratio?
Leifheit has net cash of €51m. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.
The Bottom Line On Leifheit’s P/E Ratio
Leifheit’s P/E is 15.1 which is below average (16.9) in the DE market. The recent drop in earnings per share would make investors cautious, the relatively strong balance sheet will allow the company time to invest in growth. If it achieves that, then there’s real potential that the low P/E could eventually indicate undervaluation.
When the market is wrong about a stock, it gives savvy investors an opportunity. 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 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 Leifheit. 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.
