Does Nexstar Media Group, Inc.’s (NASDAQ:NXST) P/E Ratio Signal A Buying Opportunity?
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The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll show how you can use Nexstar Media Group, Inc.’s (NASDAQ:NXST) P/E ratio to inform your assessment of the investment opportunity. Nexstar Media Group has a price to earnings ratio of 6.61, based on the last twelve months. In other words, at today’s prices, investors are paying $6.61 for every $1 in prior year profit.
See our latest analysis for Nexstar Media Group
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Nexstar Media Group:
P/E of 6.61 = $88.89 ÷ $13.44 (Based on the year to September 2018.)
Is A High P/E Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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 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. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.
It’s nice to see that Nexstar Media Group grew EPS by a stonking 382% in the last year. And earnings per share have improved by 46% annually, over the last five years. I’d therefore be a little surprised if its P/E ratio was not relatively high.
How Does Nexstar Media Group’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. We can see in the image below that the average P/E (12.5) for companies in the media industry is higher than Nexstar Media Group’s P/E.
Its relatively low P/E ratio indicates that Nexstar Media Group shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Nexstar Media Group, it’s quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. Thus, the metric does not reflect cash or debt held by the company. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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.
How Does Nexstar Media Group’s Debt Impact Its P/E Ratio?
Net debt totals 98% of Nexstar Media Group’s market cap. This is a reasonably significant level of debt — all else being equal you’d expect a much lower P/E than if it had net cash.
The Verdict On Nexstar Media Group’s P/E Ratio
Nexstar Media Group has a P/E of 6.6. That’s below the average in the US market, which is 17.4. The company may have significant debt, but EPS growth was good last year. If the company can continue to grow earnings, then the current P/E may be unjustifiably low.
Investors should be looking to buy stocks that the market is wrong about. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. 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.
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 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.
