This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to Atresmedia Corporación de Medios de Comunicación, S.A.'s (BME:A3M), to help you decide if the stock is worth further research. Atresmedia Corporación de Medios de Comunicación has a price to earnings ratio of 9.01, based on the last twelve months. That means that at current prices, buyers pay €9.01 for every €1 in trailing yearly profits.
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Atresmedia Corporación de Medios de Comunicación:
P/E of 9.01 = €3.53 ÷ €0.39 (Based on the year to June 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each €1 the company has earned over the last year. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
Does Atresmedia Corporación de Medios de Comunicación Have A Relatively High Or Low P/E For Its Industry?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. The image below shows that Atresmedia Corporación de Medios de Comunicación has a lower P/E than the average (17.9) P/E for companies in the media industry.
Its relatively low P/E ratio indicates that Atresmedia Corporación de Medios de Comunicación shareholders think it will struggle to do as well as other companies in its industry classification. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. You should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. That means even if the current P/E is low, it will increase over time if the share price stays flat. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
Atresmedia Corporación de Medios de Comunicación saw earnings per share decrease by 30% last year. But EPS is up 10% over the last 5 years. And it has shrunk its earnings per share by 12% per year over the last three years. This could justify a low P/E.
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. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).
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 Atresmedia Corporación de Medios de Comunicación's Debt Impact Its P/E Ratio?
Atresmedia Corporación de Medios de Comunicación has net debt equal to 26% of its market cap. While it's worth keeping this in mind, it isn't a worry.
The Bottom Line On Atresmedia Corporación de Medios de Comunicación's P/E Ratio
Atresmedia Corporación de Medios de Comunicación's P/E is 9.0 which is below average (16.6) in the ES market. Since it only carries a modest debt load, it's likely the low expectations implied by the P/E ratio arise from the lack of recent earnings growth.
Investors have an opportunity when market expectations about a stock are wrong. 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 visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.
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.
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.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.