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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll look at Lotus Bakeries NV’s (EBR:LOTB) P/E ratio and reflect on what it tells us about the company’s share price. Based on the last twelve months, Lotus Bakeries’s P/E ratio is 29.32. That corresponds to an earnings yield of approximately 3.4%.
See our latest analysis for Lotus Bakeries
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Lotus Bakeries:
P/E of 29.32 = €2440 ÷ €83.23 (Based on the trailing twelve months 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 is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.
Lotus Bakeries increased earnings per share by 4.7% last year. And it has bolstered its earnings per share by 16% per year over the last five years.
How Does Lotus Bakeries’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. You can see in the image below that the average P/E (25.9) for companies in the food industry is lower than Lotus Bakeries’s P/E.
Its relatively high P/E ratio indicates that Lotus Bakeries shareholders think it will perform better than other companies in its industry classification. Shareholders are clearly optimistic, but the future is always uncertain. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don’t forget that the P/E ratio considers market capitalization. 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.
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.
How Does Lotus Bakeries’s Debt Impact Its P/E Ratio?
Net debt totals just 5.6% of Lotus Bakeries’s market cap. So it doesn’t have as many options as it would with net cash, but its debt would not have much of an impact on its P/E ratio.