Why Laserbond Limited's (ASX:LBL) High P/E Ratio Isn't Necessarily A Bad Thing

Simply Wall St

Sun, Apr 7, 2019, 7:34 PM

The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). To keep it practical, we'll show how Laserbond Limited's (ASX:LBL) P/E ratio could help you assess the value on offer. Based on the last twelve months, Laserbond's P/E ratio is 19.48. That corresponds to an earnings yield of approximately 5.1%.

See our latest analysis for Laserbond

How Do You Calculate A P/E Ratio?

The formula for P/E is:

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

Or for Laserbond:

P/E of 19.48 = A$0.42 ÷ A$0.022 (Based on the year to December 2018.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each A$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

P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the 'E' increases, over time. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

It's nice to see that Laserbond grew EPS by a stonking 122% in the last year. And its annual EPS growth rate over 5 years is 37%. With that performance, I would expect it to have an above average P/E ratio.

How Does Laserbond'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 Laserbond has a higher P/E than the average (17.6) P/E for companies in the machinery industry.

ASX:LBL Price Estimation Relative to Market, April 8th 2019

That means that the market expects Laserbond will outperform other companies in its industry. The market is optimistic about the future, but that doesn't guarantee future growth. So further research is always essential. I often monitor director buying and selling.

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

Don't forget that the P/E ratio considers market capitalization. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Theoretically, a business can improve its earnings (and produce a lower P/E in the future), by taking on debt (or spending its remaining cash).

Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.