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Here's What Cinemark Holdings, Inc.'s (NYSE:CNK) P/E Ratio Is Telling Us

Simply Wall St

Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll show how you can use Cinemark Holdings, Inc.'s (NYSE:CNK) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Cinemark Holdings's P/E ratio is 21.41. That corresponds to an earnings yield of approximately 4.7%.

See our latest analysis for Cinemark Holdings

How Do I Calculate A Price To Earnings Ratio?

The formula for price to earnings is:

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

Or for Cinemark Holdings:

P/E of 21.41 = $33.78 ÷ $1.58 (Based on the trailing twelve months to September 2019.)

Is A High P/E Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each $1 of company earnings. 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 Cinemark Holdings's P/E Ratio Compare To Its Peers?

We can get an indication of market expectations by looking at the P/E ratio. If you look at the image below, you can see Cinemark Holdings has a lower P/E than the average (24.0) in the entertainment industry classification.

NYSE:CNK Price Estimation Relative to Market, December 24th 2019

Cinemark Holdings's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with Cinemark Holdings, 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

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. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.

Cinemark Holdings's earnings per share fell by 36% in the last twelve months. But it has grown its earnings per share by 2.5% per year over the last five years. And EPS is down 8.1% a year, over the last 3 years. This growth rate might warrant a low P/E ratio.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

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.

While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.

Cinemark Holdings's Balance Sheet

Net debt is 33% of Cinemark Holdings's market cap. While it's worth keeping this in mind, it isn't a worry.

The Bottom Line On Cinemark Holdings's P/E Ratio

Cinemark Holdings trades on a P/E ratio of 21.4, which is above its market average of 18.9. With modest debt but no EPS growth in the last year, it's fair to say the P/E implies some optimism about future earnings, from the market.

Investors have an opportunity when market expectations about a stock are wrong. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. 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 be able to find a better stock than Cinemark Holdings. 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 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.