Is Central European Media Enterprises Ltd’s (NASDAQ:CETV) PE Ratio A Signal To Sell For Investors?
This article is intended for those of you who are at the beginning of your investing journey and want to begin learning about how to value company based on its current earnings and what are the drawbacks of this method.
Central European Media Enterprises Ltd (NASDAQ:CETV) is currently trading at a trailing P/E of 22.3, which is higher than the industry average of 11.6. While this might not seem positive, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. In this article, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio.
View our latest analysis for Central European Media Enterprises
Breaking down the P/E ratio
The P/E ratio is a popular ratio used in relative valuation since earnings power is a key driver of investment value. By comparing a stock’s price per share to its earnings per share, we are able to see how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for CETV
Price-Earnings Ratio = Price per share ÷ Earnings per share
CETV Price-Earnings Ratio = $3.67 ÷ $0.165 = 22.3x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to CETV, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use. Since CETV’s P/E of 22.3 is higher than its industry peers (11.6), it means that investors are paying more for each dollar of CETV’s earnings. This multiple is a median of profitable companies of 25 Media companies in US including Commerce Planet, Global Gateway Media & Communications and Emmis Communications. You could think of it like this: the market is pricing CETV as if it is a stronger company than the average of its industry group.
Assumptions to be aware of
However, it is important to note that our examination of the stock is based on certain assumptions. The first is that our “similar companies” are actually similar to CETV. If not, the difference in P/E might be a result of other factors. Take, for example, the scenario where Central European Media Enterprises Ltd is growing profits more quickly than the average comparable company. In that case, the market may be correct to value it on a higher P/E ratio. We should also be aware that the stocks we are comparing to CETV may not be fairly valued. Just because it is trading on a higher P/E ratio than its peers does not mean it must be overvalued. After all, the peer group could be undervalued.
What this means for you:
If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to rebalance your portfolio and reduce your holdings in CETV. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned above. Remember that basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PE ratio is very one-dimensional. If you have not done so already, I urge you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for CETV’s future growth? Take a look at our free research report of analyst consensus for CETV’s outlook.
Past Track Record: Has CETV been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of CETV’s historicals for more clarity.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
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.
