This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll look at ProSiebenSat.1 Media SE's (ETR:PSM) P/E ratio and reflect on what it tells us about the company's share price. Looking at earnings over the last twelve months, ProSiebenSat.1 Media has a P/E ratio of 13.32. That is equivalent to an earnings yield of about 7.5%.
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 ProSiebenSat.1 Media:
P/E of 13.32 = €12.79 ÷ €0.96 (Based on the trailing twelve months to September 2019.)
Is A High P/E 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 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 ProSiebenSat.1 Media's P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. The image below shows that ProSiebenSat.1 Media has a lower P/E than the average (26.2) P/E for companies in the media industry.
Its relatively low P/E ratio indicates that ProSiebenSat.1 Media shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with ProSiebenSat.1 Media, it's quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the 'E' will be lower. That means unless the share price falls, the P/E will increase in a few years. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
ProSiebenSat.1 Media's earnings per share fell by 51% in the last twelve months. And over the longer term (5 years) earnings per share have decreased 11% annually. This could justify a pessimistic 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. Thus, the metric does not reflect cash or debt held by the company. 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).
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.
So What Does ProSiebenSat.1 Media's Balance Sheet Tell Us?
ProSiebenSat.1 Media has net debt worth 82% of its market capitalization. This is enough debt that you'd have to make some adjustments before using the P/E ratio to compare it to a company with net cash.
The Verdict On ProSiebenSat.1 Media's P/E Ratio
ProSiebenSat.1 Media trades on a P/E ratio of 13.3, which is below the DE market average of 19.9. When you consider that the company has significant debt, and didn't grow EPS last year, it isn't surprising that the market has muted expectations.
When the market is wrong about a stock, it gives savvy investors an opportunity. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine. So this free report on the analyst consensus forecasts could help you make a master move on this stock.
Of course you might be able to find a better stock than ProSiebenSat.1 Media. So you may wish to see this free collection of other companies that have grown earnings strongly.
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.
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.