The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll look at Compagnie Lebon’s (EPA:LBON) P/E ratio and reflect on what it tells us about the company’s share price. Compagnie Lebon has a price to earnings ratio of 12.25, based on the last twelve months. That is equivalent to an earnings yield of about 8.2%.
See our latest analysis for Compagnie Lebon
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Compagnie Lebon:
P/E of 12.25 = €129 ÷ €10.53 (Based on the trailing twelve months to June 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
P/E ratios primarily reflect market expectations around earnings growth rates. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. That means unless the share price increases, the P/E will reduce in a few years. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.
Compagnie Lebon’s earnings per share fell by 37% in the last twelve months. But over the longer term (5 years) earnings per share have increased by 16%.
How Does Compagnie Lebon’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. As you can see below Compagnie Lebon has a P/E ratio that is fairly close for the average for the capital markets industry, which is 12.3.
That indicates that the market expects Compagnie Lebon will perform roughly in line with other companies in its industry. The company could surprise by performing better than average, in the future. Checking factors such as the tenure of the board and management could help you form your own view on if that will happen.
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. That means it doesn’t take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
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.
Is Debt Impacting Compagnie Lebon’s P/E?
Net debt totals 42% of Compagnie Lebon’s market cap. If you want to compare its P/E ratio to other companies, you should absolutely keep in mind it has significant borrowings.