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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 show how you can use Lululemon Athletica Inc.'s (NASDAQ:LULU) P/E ratio to inform your assessment of the investment opportunity. What is Lululemon Athletica's P/E ratio? Well, based on the last twelve months it is 45.66. That corresponds to an earnings yield of approximately 2.2%.
See our latest analysis for Lululemon Athletica
How Do You Calculate Lululemon Athletica's P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Lululemon Athletica:
P/E of 45.66 = $165.59 ÷ $3.63 (Based on the trailing twelve months to February 2019.)
Is A High P/E Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each $1 of company earnings. 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 Growth Rates Impact P/E Ratios
Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. When earnings grow, the 'E' increases, over time. That means unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.
Lululemon Athletica's earnings made like a rocket, taking off 88% last year. Even better, EPS is up 24% per year over three years. So we'd absolutely expect it to have a relatively high P/E ratio.
Does Lululemon Athletica Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio indicates whether the market has higher or lower expectations of a company. As you can see below, Lululemon Athletica has a higher P/E than the average company (16) in the luxury industry.
Lululemon Athletica's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and selling.
Remember: P/E Ratios Don't Consider The Balance Sheet
The 'Price' in P/E reflects the market capitalization of the company. Thus, the metric does not reflect cash or debt held by the company. 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 Lululemon Athletica's P/E?
The extra options and safety that comes with Lululemon Athletica's US$881m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.
The Bottom Line On Lululemon Athletica's P/E Ratio
Lululemon Athletica has a P/E of 45.7. That's higher than the average in the US market, which is 17. The excess cash it carries is the gravy on top its fast EPS growth. To us, this is the sort of company that we would expect to carry an above average price tag (relative to earnings).
When the market is wrong about a stock, it gives savvy investors an opportunity. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. So this free report on the analyst consensus forecasts could help you make a master move on this stock.
Of course you might be able to find a better stock than Lululemon Athletica. So you may wish to see this free collection of other companies that have grown earnings strongly.
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.