Yahoo Finance Why Lululemon Athletica Inc.'s (NASDAQ:LULU) High P/E Ratio Isn't Necessarily A Bad Thing
This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). To keep it practical, we'll show how Lululemon Athletica Inc.'s (NASDAQ:LULU) P/E ratio could help you assess the value on offer. Looking at earnings over the last twelve months, Lululemon Athletica has a P/E ratio of 47.41. In other words, at today's prices, investors are paying $47.41 for every $1 in prior year profit.
View our latest analysis for Lululemon Athletica
How Do You Calculate Lululemon Athletica's P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Lululemon Athletica:
P/E of 47.41 = $193.02 ÷ $4.07 (Based on the year to August 2019.)
Is A High P/E Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. That isn't necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
How Does Lululemon Athletica's P/E Ratio Compare To Its Peers?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. As you can see below, Lululemon Athletica has a higher P/E than the average company (17.1) in the luxury industry.
Lululemon Athletica'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 investors should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. 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.
In the last year, Lululemon Athletica grew EPS like Taylor Swift grew her fan base back in 2010; the 56% gain was both fast and well deserved. The cherry on top is that the five year growth rate was an impressive 19% per year. With that kind of growth rate we would generally expect a high P/E ratio.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
The 'Price' in P/E reflects the market capitalization of the company. 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.
Is Debt Impacting Lululemon Athletica's P/E?
Since Lululemon Athletica holds net cash of US$624m, it can spend on growth, justifying a higher P/E ratio than otherwise.
The Verdict On Lululemon Athletica's P/E Ratio
Lululemon Athletica's P/E is 47.4 which is above average (18.0) in its market. Its net cash position is the cherry on top of its superb EPS growth. So based on this analysis we'd expect Lululemon Athletica to have a high P/E ratio.
Investors have an opportunity when market expectations about a stock are wrong. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. So this free report on the analyst consensus forecasts could help you make a master move on this stock.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
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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.