This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). To keep it practical, we'll show how Lanson-BCC's (EPA:ALLAN) P/E ratio could help you assess the value on offer. Lanson-BCC has a P/E ratio of 15.56, based on the last twelve months. That corresponds to an earnings yield of approximately 6.4%.

Check out our latest analysis for Lanson-BCC

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 Lanson-BCC:

P/E of 15.56 = €27.8 ÷ €1.79 (Based on the year to December 2018.)

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 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 Does Lanson-BCC's P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that Lanson-BCC has a lower P/E than the average (26.3) P/E for companies in the beverage industry.

Lanson-BCC's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with Lanson-BCC, it's quite possible it could surprise on the upside. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. When earnings grow, the 'E' increases, over time. And in that case, the P/E ratio itself will drop rather quickly. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

Lanson-BCC's earnings per share grew by -8.8% in the last twelve months. And its annual EPS growth rate over 3 years is 1.2%. In contrast, EPS has decreased by 8.0%, annually, over 5 years.

Remember: P/E Ratios Don't Consider The Balance Sheet

The 'Price' in P/E reflects the market capitalization of the company. In other words, it does not consider any debt or cash that the company may have on the balance sheet. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

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 Lanson-BCC's Debt Impact Its P/E Ratio?

Lanson-BCC's net debt is considerable, at 264% of its market cap. This is a relatively high level of debt, so the stock probably deserves a relatively low P/E ratio. Keep that in mind when comparing it to other companies.