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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 Lincoln Electric Holdings, Inc.’s (NASDAQ:LECO) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Lincoln Electric Holdings’s P/E ratio is 22.52. That is equivalent to an earnings yield of about 4.4%.
Check out our latest analysis for Lincoln Electric Holdings
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Lincoln Electric Holdings:
P/E of 22.52 = $77.33 ÷ $3.43 (Based on the year to September 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each $1 the company has earned over the last year. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the ‘E’ will be higher. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.
Lincoln Electric Holdings’s earnings per share fell by 18% in the last twelve months. But EPS is up 2.4% over the last 5 years.
How Does Lincoln Electric Holdings’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. As you can see below, Lincoln Electric Holdings has a higher P/E than the average company (18.1) in the machinery industry.
That means that the market expects Lincoln Electric Holdings will outperform other companies in its industry. The market is optimistic about the future, but that doesn’t guarantee future growth. So investors should delve deeper. I like to check if company insiders have been buying or selling.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. 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.
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.
How Does Lincoln Electric Holdings’s Debt Impact Its P/E Ratio?
Lincoln Electric Holdings has net debt worth just 4.3% of its market capitalization. The market might award it a higher P/E ratio if it had net cash, but its unlikely this low level of net borrowing is having a big impact on the P/E multiple.