What Is Lindsay's (NYSE:LNN) P/E Ratio After Its Share Price Rocketed?

Lindsay (NYSE:LNN) shares have had a really impressive month, gaining 31%, after some slippage. The full year gain of 20% is pretty reasonable, too.

All else being equal, a sharp share price increase should make a stock less attractive to potential investors. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. The implication here is that deep value investors might steer clear when expectations of a company are too high. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.

See our latest analysis for Lindsay

How Does Lindsay's P/E Ratio Compare To Its Peers?

We can tell from its P/E ratio of 59.88 that there is some investor optimism about Lindsay. The image below shows that Lindsay has a significantly higher P/E than the average (16.5) P/E for companies in the machinery industry.

Its relatively high P/E ratio indicates that Lindsay shareholders think it will perform better than other companies in its industry classification. Clearly the market expects growth, but it isn't guaranteed. So further research is always essential. I often monitor director buying and selling.

How Growth Rates Impact P/E Ratios

When earnings fall, the 'E' decreases, over time. That means even if the current P/E is low, it will increase over time if the share price stays flat. Then, a higher P/E might scare off shareholders, pushing the share price down.

Lindsay increased earnings per share by a whopping 40% last year. But earnings per share are down 14% per year over the last five 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. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).

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 Lindsay's P/E?

Since Lindsay holds net cash of US$4.0m, it can spend on growth, justifying a higher P/E ratio than otherwise.

The Bottom Line On Lindsay's P/E Ratio

With a P/E ratio of 59.9, Lindsay is expected to grow earnings very strongly in the years to come. Its net cash position is the cherry on top of its superb EPS growth. So based on this analysis we'd expect Lindsay to have a high P/E ratio. What is very clear is that the market has become significantly more optimistic about Lindsay over the last month, with the P/E ratio rising from 45.7 back then to 59.9 today. If you like to buy stocks that have recently impressed the market, then this one might be a candidate; but if you prefer to invest when there is 'blood in the streets', then you may feel the opportunity has passed.

When the market is wrong about a stock, it gives savvy investors an opportunity. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

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.

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