The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll show how you can use LPKF Laser & Electronics AG's (ETR:LPK) P/E ratio to inform your assessment of the investment opportunity. LPKF Laser & Electronics has a P/E ratio of 23.85, based on the last twelve months. In other words, at today's prices, investors are paying €23.85 for every €1 in prior year profit.
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for LPKF Laser & Electronics:
P/E of 23.85 = €14.00 ÷ €0.59 (Based on the trailing twelve months to September 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each €1 of company earnings. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
Does LPKF Laser & Electronics 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. The image below shows that LPKF Laser & Electronics has a P/E ratio that is roughly in line with the electronic industry average (23.8).
That indicates that the market expects LPKF Laser & Electronics will perform roughly in line with other companies in its industry. So if LPKF Laser & Electronics actually outperforms its peers going forward, that should be a positive for the share price. I would further inform my view by checking insider buying and selling., among other things.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the 'E' increases, over time. 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.
LPKF Laser & Electronics's 145% EPS improvement over the last year was like bamboo growth after rain; rapid and impressive.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
The 'Price' in P/E reflects the market capitalization of the company. 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.
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.
How Does LPKF Laser & Electronics's Debt Impact Its P/E Ratio?
LPKF Laser & Electronics has net cash of €12m. 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 LPKF Laser & Electronics's P/E Ratio
LPKF Laser & Electronics trades on a P/E ratio of 23.8, which is above its market average of 20.0. The excess cash it carries is the gravy on top its fast EPS growth. So based on this analysis we'd expect LPKF Laser & Electronics to have a high P/E ratio.
Investors have an opportunity when market expectations about a stock are wrong. 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 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 LPKF Laser & Electronics. So you may wish to see this free collection of other companies that have grown earnings strongly.
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.