This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll apply a basic P/E ratio analysis to LifeVantage Corporation’s (NASDAQ:LFVN), to help you decide if the stock is worth further research. What is LifeVantage’s P/E ratio? Well, based on the last twelve months it is 24.12. That corresponds to an earnings yield of approximately 4.1%.
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for LifeVantage:
P/E of 24.12 = $11.2 ÷ $0.46 (Based on the year to March 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each $1 of company earnings. All else being equal, it’s better to pay a low price — but as Warren Buffett said, ‘It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.’
How Does LifeVantage’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. You can see in the image below that the average P/E (20.2) for companies in the personal products industry is lower than LifeVantage’s P/E.
LifeVantage’s P/E tells us that market participants think the company will perform better than its industry peers, going forward.
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. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. And in that case, the P/E ratio itself will drop rather quickly. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
In the last year, LifeVantage grew EPS like Taylor Swift grew her fan base back in 2010; the 127% gain was both fast and well deserved. Even better, EPS is up 18% per year over three years. So you might say it really deserves to have an above-average P/E ratio. Unfortunately, earnings per share are down 4.0% a year, over 5 years.
Remember: P/E Ratios Don’t Consider The Balance Sheet
The ‘Price’ in P/E reflects the market capitalization of the company. So it won’t reflect the advantage of cash, or disadvantage of debt. 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.
Is Debt Impacting LifeVantage’s P/E?
The extra options and safety that comes with LifeVantage’s US$14m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.
The Verdict On LifeVantage’s P/E Ratio
LifeVantage has a P/E of 24.1. That’s higher than the average in its market, which is 17.9. Its net cash position is the cherry on top of its superb EPS growth. So based on this analysis we’d expect LifeVantage to have a high P/E ratio.
Investors have an opportunity when market expectations about a stock are wrong. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. Although we don’t have analyst forecasts, you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.
Of course you might be able to find a better stock than LifeVantage. 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 email@example.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.