Yahoo Finance Don't Sell Lowe's Companies, Inc. (NYSE:LOW) Before You Read This
This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll show how you can use Lowe's Companies, Inc.'s (NYSE:LOW) P/E ratio to inform your assessment of the investment opportunity. What is Lowe's Companies's P/E ratio? Well, based on the last twelve months it is 33.55. That means that at current prices, buyers pay $33.55 for every $1 in trailing yearly profits.
See our latest analysis for Lowe's Companies
How Do I Calculate Lowe's Companies's Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Lowe's Companies:
P/E of 33.55 = USD125.42 ÷ USD3.74 (Based on the year to November 2019.)
Is A High Price-to-Earnings Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing 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 Does Lowe's Companies's P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. As you can see below, Lowe's Companies has a higher P/E than the average company (16.7) in the specialty retail industry.
Its relatively high P/E ratio indicates that Lowe's Companies shareholders think it will perform better than other companies in its industry classification. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. That means even if the current P/E is high, it will reduce over time if the share price stays flat. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
Lowe's Companies shrunk earnings per share by 17% over the last year. But over the longer term (5 years) earnings per share have increased by 8.2%.
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. In other words, it does not consider any debt or cash that the company may have on the balance sheet. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.
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.
So What Does Lowe's Companies's Balance Sheet Tell Us?
Lowe's Companies's net debt is 17% of its market cap. That's enough debt to impact the P/E ratio a little; so keep it in mind if you're comparing it to companies without debt.
The Verdict On Lowe's Companies's P/E Ratio
Lowe's Companies's P/E is 33.6 which is above average (18.4) in its market. With a bit of debt, but a lack of recent growth, it's safe to say the market is expecting improved profit performance from the company, in the next few years.
Investors should be looking to buy stocks that the market is wrong about. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. 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.
You might be able to find a better buy than Lowe's Companies. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
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.
