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Don't Sell Invibes Advertising SA (EPA:ALINV) Before You Read This

The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at Invibes Advertising SA's (EPA:ALINV) P/E ratio and reflect on what it tells us about the company's share price. Invibes Advertising has a price to earnings ratio of 20.62, based on the last twelve months. That corresponds to an earnings yield of approximately 4.9%.

See our latest analysis for Invibes Advertising

How Do You Calculate A P/E Ratio?

The formula for P/E is:

Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)

Or for Invibes Advertising:

P/E of 20.62 = €5.30 ÷ €0.26 (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 isn't a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business's prospects, relative to stocks with a lower P/E.

Does Invibes Advertising Have A Relatively High Or Low P/E For Its Industry?

The P/E ratio indicates whether the market has higher or lower expectations of a company. You can see in the image below that the average P/E (16.1) for companies in the media industry is lower than Invibes Advertising's P/E.

ENXTPA:ALINV Price Estimation Relative to Market, November 13th 2019
ENXTPA:ALINV Price Estimation Relative to Market, November 13th 2019

Invibes Advertising's P/E tells us that market participants think the company will perform better than its industry peers, going forward. 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

Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. When earnings grow, the 'E' increases, over time. That means unless the share price increases, the P/E will reduce in a few years. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

Invibes Advertising shrunk earnings per share by 4.1% last year. But EPS is up 51% over the last 3 years.

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

The 'Price' in P/E reflects the market capitalization of the company. 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 expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.

How Does Invibes Advertising's Debt Impact Its P/E Ratio?

The extra options and safety that comes with Invibes Advertising's €348k net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.

The Bottom Line On Invibes Advertising's P/E Ratio

Invibes Advertising has a P/E of 20.6. That's higher than the average in its market, which is 18.0. Falling earnings per share is probably keeping traditional value investors away, but the healthy balance sheet means the company retains potential for future growth. If fails to eventuate, the current high P/E could prove to be temporary, as the share price falls.

Investors have an opportunity when market expectations about a stock are wrong. 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 visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.

But note: Invibes Advertising may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio 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.

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