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How Does Arnoldo Mondadori Editore's (BIT:MN) P/E Compare To Its Industry, After The Share Price Drop?

To the annoyance of some shareholders, Arnoldo Mondadori Editore (BIT:MN) shares are down a considerable 31% in the last month. Even longer term holders have taken a real hit with the stock declining 25% in the last year.

All else being equal, a share price drop should make a stock more attractive to potential investors. In the long term, share prices tend to follow earnings per share, but in the short term prices bounce around in response to short term factors (which are not always obvious). So, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. Perhaps the simplest way to get a read on investors' expectations of a business is to look at its Price to Earnings Ratio (PE Ratio). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.

Check out our latest analysis for Arnoldo Mondadori Editore

Does Arnoldo Mondadori Editore Have A Relatively High Or Low P/E For Its Industry?

Arnoldo Mondadori Editore's P/E of 12.44 indicates some degree of optimism towards the stock. You can see in the image below that the average P/E (10.8) for companies in the media industry is lower than Arnoldo Mondadori Editore's P/E.

BIT:MN Price Estimation Relative to Market, March 12th 2020
BIT:MN Price Estimation Relative to Market, March 12th 2020

That means that the market expects Arnoldo Mondadori Editore will outperform other companies in its industry. The market is optimistic about the future, but that doesn't guarantee future growth. So investors should delve deeper. I like to check if company insiders have been buying or selling.

How Growth Rates Impact P/E Ratios

When earnings fall, the 'E' decreases, over time. That means even if the current P/E is low, it will increase over time if the share price stays flat. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.

Arnoldo Mondadori Editore's 205% EPS improvement over the last year was like bamboo growth after rain; rapid and impressive. Regrettably, the longer term performance is poor, with EPS down per year over 3 years.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. That means it doesn't take debt or cash into account. 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.

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).

How Does Arnoldo Mondadori Editore's Debt Impact Its P/E Ratio?

Arnoldo Mondadori Editore's net debt equates to 38% of its market capitalization. You'd want to be aware of this fact, but it doesn't bother us.

The Verdict On Arnoldo Mondadori Editore's P/E Ratio

Arnoldo Mondadori Editore trades on a P/E ratio of 12.4, which is below the IT market average of 13.9. The company does have a little debt, and EPS growth was good last year. If the company can continue to grow earnings, then the current P/E may be unjustifiably low. Given analysts are expecting further growth, one might have expected a higher P/E ratio. That may be worth further research. Given Arnoldo Mondadori Editore's P/E ratio has declined from 18.1 to 12.4 in the last month, we know for sure that the market is significantly less confident about the business today, than it was back then. For those who don't like to trade against momentum, that could be a warning sign, but a contrarian investor might want to take a closer look.

Investors should be looking to buy stocks that the market is wrong about. 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 visual report on analyst forecasts could hold the key to an excellent investment decision.

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.

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.

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