Yahoo Finance Here's What The Estée Lauder Companies Inc.'s (NYSE:EL) P/E Is Telling Us
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 The Estée Lauder Companies Inc.'s (NYSE:EL) P/E ratio could help you assess the value on offer. Estée Lauder Companies has a price to earnings ratio of 30.50, based on the last twelve months. That is equivalent to an earnings yield of about 3.3%.
View our latest analysis for Estée Lauder Companies
How Do You Calculate Estée Lauder Companies's P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Estée Lauder Companies:
P/E of 30.50 = $157.350 ÷ $5.158 (Based on the trailing twelve months to December 2019.)
(Note: the above calculation results may not be precise due to rounding.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price'.
Does Estée Lauder Companies Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company. The image below shows that Estée Lauder Companies has a higher P/E than the average (13.3) P/E for companies in the personal products industry.
Its relatively high P/E ratio indicates that Estée Lauder Companies shareholders think it will perform better than other companies in its industry classification. The market is optimistic about the future, but that doesn't guarantee future growth. 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. When earnings grow, the 'E' increases, over time. 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.
Estée Lauder Companies increased earnings per share by an impressive 16% over the last twelve months. And earnings per share have improved by 12% annually, over the last five years. So one might expect an above average P/E ratio.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don't forget that the P/E ratio considers market capitalization. So it won't reflect the advantage of cash, or disadvantage of debt. In theory, a company can lower its future P/E ratio by using cash or debt to invest in 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.
Estée Lauder Companies's Balance Sheet
Estée Lauder Companies has net debt worth just 2.8% of its market capitalization. So it doesn't have as many options as it would with net cash, but its debt would not have much of an impact on its P/E ratio.
The Verdict On Estée Lauder Companies's P/E Ratio
Estée Lauder Companies trades on a P/E ratio of 30.5, which is above its market average of 13.3. While the company does use modest debt, its recent earnings growth is very good. So on this analysis it seems reasonable that its P/E ratio is above average.
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: Estée Lauder Companies 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).
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.
