Yahoo Finance Does Johns Lyng Group Limited’s (ASX:JLG) P/E Ratio Signal A Buying Opportunity?
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 Johns Lyng Group Limited’s (ASX:JLG) P/E ratio could help you assess the value on offer. Johns Lyng Group has a price to earnings ratio of 14.83, based on the last twelve months. That corresponds to an earnings yield of approximately 6.7%.
Check out our latest analysis for Johns Lyng Group
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 Johns Lyng Group:
P/E of 14.83 = A$0.80 ÷ A$0.054 (Based on the trailing twelve months to June 2018.)
Is A High P/E Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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
P/E ratios primarily reflect market expectations around earnings growth rates. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. 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.
Johns Lyng Group shrunk earnings per share by 19% over the last year. But it has grown its earnings per share by 23% per year over the last five years.
How Does Johns Lyng 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. You can see in the image below that the average P/E (15) for companies in the construction industry is roughly the same as Johns Lyng Group’s P/E.
Its P/E ratio suggests that Johns Lyng Group shareholders think that in the future it will perform about the same as other companies in its industry classification. So if Johns Lyng Group actually outperforms its peers going forward, that should be a positive for the share price. Checking factors such as the tenure of the board and management could help you form your own view on if that will happen.
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. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).
Is Debt Impacting Johns Lyng Group’s P/E?
Johns Lyng Group has net cash of AU$18m. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.
The Bottom Line On Johns Lyng Group’s P/E Ratio
Johns Lyng Group trades on a P/E ratio of 14.8, which is fairly close to the AU market average of 15.2. While the lack of recent growth is probably muting optimism, the net cash position means it’s not surprising that expectations put the company roughly in line with the market average P/E.
Investors have an opportunity when market expectations about a stock are wrong. 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 visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.
Of course you might be able to find a better stock than Johns Lyng Group. So you may wish to see this free collection of other companies that have grown earnings strongly.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
