Yahoo Finance A Sliding Share Price Has Us Looking At Deutsche Lufthansa AG's (ETR:LHA) P/E Ratio
Unfortunately for some shareholders, the Deutsche Lufthansa (ETR:LHA) share price has dived 31% in the last thirty days. Indeed the recent decline has arguably caused some bitterness for shareholders who have held through the 54% drop over twelve months.
Assuming nothing else has changed, a lower share price makes a stock more attractive to potential buyers. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. So, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). A high P/E ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.
Check out our latest analysis for Deutsche Lufthansa
Does Deutsche Lufthansa Have A Relatively High Or Low P/E For Its Industry?
Deutsche Lufthansa's P/E of 3.55 indicates relatively low sentiment towards the stock. We can see in the image below that the average P/E (5.6) for companies in the airlines industry is higher than Deutsche Lufthansa's P/E.
Its relatively low P/E ratio indicates that Deutsche Lufthansa shareholders think it will struggle to do as well as other companies in its industry classification. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
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.
Deutsche Lufthansa saw earnings per share decrease by 44% last year. But it has grown its earnings per share by 85% per year over the last five years. And over the longer term (3 years) earnings per share have decreased 13% annually. This could justify a low P/E.
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. 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.
Is Debt Impacting Deutsche Lufthansa's P/E?
Deutsche Lufthansa has net debt worth 88% of its market capitalization. If you want to compare its P/E ratio to other companies, you should absolutely keep in mind it has significant borrowings.
The Bottom Line On Deutsche Lufthansa's P/E Ratio
Deutsche Lufthansa's P/E is 3.5 which is below average (16.5) in the DE market. The P/E reflects market pessimism that probably arises from the lack of recent EPS growth, paired with significant leverage. Given Deutsche Lufthansa's P/E ratio has declined from 5.1 to 3.5 in the last month, we know for sure that the market is more worried about the business today, than it was back then. For those who prefer invest in growth, this stock apparently offers limited promise, but the deep value investors may find the pessimism around this stock enticing.
When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
Of course you might be able to find a better stock than Deutsche Lufthansa. So you may wish to see this free collection of other companies that have grown earnings strongly.
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.
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. Thank you for reading.
