Yahoo Finance Is Lok'nStore Group Plc's (LON:LOK) High P/E Ratio A Problem For Investors?
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The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at Lok'nStore Group Plc's (LON:LOK) P/E ratio and reflect on what it tells us about the company's share price. Based on the last twelve months, Lok'nStore Group's P/E ratio is 37.55. That means that at current prices, buyers pay £37.55 for every £1 in trailing yearly profits.
View our latest analysis for Lok'nStore Group
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 Lok'nStore Group:
P/E of 37.55 = £4.9 ÷ £0.13 (Based on the trailing twelve months to July 2018.)
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. 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
Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
It's great to see that Lok'nStore Group grew EPS by 18% in the last year. And earnings per share have improved by 23% annually, over the last five years. With that performance, you might expect an above average P/E ratio. But earnings per share are down 2.0% per year over the last three years.
How Does Lok'nStore Group's P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that Lok'nStore Group has a significantly higher P/E than the average (10.1) P/E for companies in the real estate industry.
Lok'nStore Group'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
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. That means it doesn't take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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.
How Does Lok'nStore Group's Debt Impact Its P/E Ratio?
Net debt totals 23% of Lok'nStore Group's market cap. This could bring some additional risk, and reduce the number of investment options for management; worth remembering if you compare its P/E to businesses without debt.
The Bottom Line On Lok'nStore Group's P/E Ratio
Lok'nStore Group's P/E is 37.6 which is above average (15.6) in the GB market. The company is not overly constrained by its modest debt levels, and it is growing earnings per share. So it is not surprising the market is probably extrapolating recent growth well into the future, reflected in the relatively high P/E ratio.
Investors have an opportunity when market expectations about a stock are wrong. 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 visual report on analyst forecasts could hold the key to an excellent investment decision.
But note: Lok'nStore Group may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
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.
