Is Lindsay Australia Limited’s (ASX:LAU) P/E Ratio Really That Good?

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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 Lindsay Australia Limited’s (ASX:LAU) P/E ratio and reflect on what it tells us about the company’s share price. Lindsay Australia has a P/E ratio of 12.19, based on the last twelve months. That means that at current prices, buyers pay A$12.19 for every A$1 in trailing yearly profits.

See our latest analysis for Lindsay Australia

How Do I Calculate A Price To Earnings Ratio?

The formula for price to earnings is:

Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)

Or for Lindsay Australia:

P/E of 12.19 = A$0.35 ÷ A$0.029 (Based on the year to December 2018.)

Is A High P/E Ratio Good?

A higher P/E ratio means that buyers have to pay a higher price for each A$1 the company has earned over the last year. 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 Does Lindsay Australia’s P/E Ratio Compare To Its Peers?

We can get an indication of market expectations by looking at the P/E ratio. The image below shows that Lindsay Australia has a lower P/E than the average (13.8) P/E for companies in the transportation industry.

ASX:LAU Price Estimation Relative to Market, July 12th 2019
ASX:LAU Price Estimation Relative to Market, July 12th 2019

Its relatively low P/E ratio indicates that Lindsay Australia shareholders think it will struggle to do as well as other companies in its industry classification.

How Growth Rates Impact P/E Ratios

Probably the most important factor in determining what P/E a company trades on is the earnings growth. When earnings grow, the ‘E’ increases, over time. And in that case, the P/E ratio itself will drop rather quickly. Then, a lower P/E should attract more buyers, pushing the share price up.

Lindsay Australia’s earnings made like a rocket, taking off 52% last year. Having said that, if we look back three years, EPS growth has averaged a comparatively less impressive 3.0%. Regrettably, the longer term performance is poor, with EPS down 1.3% per year over 5 years.

Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. So it won’t reflect the advantage of cash, or disadvantage of debt. 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.

Is Debt Impacting Lindsay Australia’s P/E?

Lindsay Australia’s net debt is considerable, at 106% of its market cap. If you want to compare its P/E ratio to other companies, you must keep in mind that these debt levels would usually warrant a relatively low P/E.

The Verdict On Lindsay Australia’s P/E Ratio

Lindsay Australia’s P/E is 12.2 which is below average (16.3) in the AU market. The company may have significant debt, but EPS growth was good last year. The low P/E ratio suggests current market expectations are muted, implying these levels of growth will not continue.

When the market is wrong about a stock, it gives savvy investors an opportunity. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.

But note: Lindsay Australia may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

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 editorial-team@simplywallst.com. 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.