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Here's How P/E Ratios Can Help Us Understand RCS MediaGroup S.p.A. (BIT:RCS)

This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll show how you can use RCS MediaGroup S.p.A.'s (BIT:RCS) P/E ratio to inform your assessment of the investment opportunity. What is RCS MediaGroup's P/E ratio? Well, based on the last twelve months it is 5.66. That means that at current prices, buyers pay €5.66 for every €1 in trailing yearly profits.

View our latest analysis for RCS MediaGroup

How Do I Calculate A Price To Earnings Ratio?

The formula for price to earnings is:

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

Or for RCS MediaGroup:

P/E of 5.66 = €0.82 ÷ €0.14 (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. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.'

Does RCS MediaGroup 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 RCS MediaGroup has a lower P/E than the average (14.8) P/E for companies in the media industry.

BIT:RCS Price Estimation Relative to Market, August 15th 2019
BIT:RCS Price Estimation Relative to Market, August 15th 2019

This suggests that market participants think RCS MediaGroup will underperform other companies in its industry. Since the market seems unimpressed with RCS MediaGroup, it's quite possible it could surprise on the upside. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.

How Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. 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. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

RCS MediaGroup shrunk earnings per share by 17% over the last year.

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

Don't forget that the P/E ratio considers market capitalization. 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 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 RCS MediaGroup's Debt Impact Its P/E Ratio?

RCS MediaGroup has net debt equal to 42% of its market cap. You'd want to be aware of this fact, but it doesn't bother us.

The Verdict On RCS MediaGroup's P/E Ratio

RCS MediaGroup trades on a P/E ratio of 5.7, which is below the IT market average of 15.6. The debt levels are not a major concern, but the lack of EPS growth is likely weighing on sentiment.

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: RCS MediaGroup 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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