This article is written for those who want to get better at using price to earnings ratios (P/E ratios). To keep it practical, we'll show how Lubelski Wegiel Bogdanka S.A.'s (WSE:LWB) P/E ratio could help you assess the value on offer. What is Lubelski Wegiel Bogdanka's P/E ratio? Well, based on the last twelve months it is 5.13. In other words, at today's prices, investors are paying PLN5.13 for every PLN1 in prior year profit.
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Lubelski Wegiel Bogdanka:
P/E of 5.13 = PLN36.40 ÷ PLN7.10 (Based on the trailing twelve months to September 2019.)
Is A High Price-to-Earnings 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.
Does Lubelski Wegiel Bogdanka Have A Relatively High Or Low P/E For Its Industry?
We can get an indication of market expectations by looking at the P/E ratio. The image below shows that Lubelski Wegiel Bogdanka has a lower P/E than the average (7.9) P/E for companies in the oil and gas industry.
This suggests that market participants think Lubelski Wegiel Bogdanka will underperform other companies in its industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. You should delve deeper. I like to check if company insiders have been buying or selling.
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. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means even if the current P/E is high, it will reduce over time if the share price stays flat. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Lubelski Wegiel Bogdanka shrunk earnings per share by 60% over the last year. And over the longer term (5 years) earnings per share have decreased 2.7% annually. This might lead to muted expectations.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. 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).
Is Debt Impacting Lubelski Wegiel Bogdanka's P/E?
Lubelski Wegiel Bogdanka has net cash of zł283m. This is fairly high at 23% of its market capitalization. That might mean balance sheet strength is important to the business, but should also help push the P/E a bit higher than it would otherwise be.
The Verdict On Lubelski Wegiel Bogdanka's P/E Ratio
Lubelski Wegiel Bogdanka trades on a P/E ratio of 5.1, which is below the PL market average of 10.8. Falling earnings per share are likely to be keeping potential buyers away, but the net cash position means the company has time to improve: if so, the low P/E could be an opportunity.
Investors have an opportunity when market expectations about a stock are wrong. 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: Lubelski Wegiel Bogdanka 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).
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.
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