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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 LNA Santé SA's (EPA:LNA) P/E ratio could help you assess the value on offer. Based on the last twelve months, LNA Santé's P/E ratio is 21.42. That corresponds to an earnings yield of approximately 4.7%.
Check out our latest analysis for LNA Santé
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for LNA Santé:
P/E of 21.42 = €47.7 ÷ €2.23 (Based on the year to December 2018.)
Is A High P/E Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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 LNA Santé's P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. We can see in the image below that the average P/E (30.5) for companies in the healthcare industry is higher than LNA Santé's P/E.
LNA Santé'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 LNA Santé, it's quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. 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.
LNA Santé shrunk earnings per share by 11% over the last year. But EPS is up 20% over the last 5 years.
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. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
LNA Santé's Balance Sheet
Net debt is 36% of LNA Santé's market cap. While it's worth keeping this in mind, it isn't a worry.