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 Ten Entertainment Group plc's (LON:TEG) P/E ratio to inform your assessment of the investment opportunity. Looking at earnings over the last twelve months, Ten Entertainment Group has a P/E ratio of 18.2. That is equivalent to an earnings yield of about 5.5%.
Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
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 Ten Entertainment Group:
P/E of 18.2 = £2.28 ÷ £0.13 (Based on the year to December 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
Earnings growth rates have a big influence on P/E ratios. When earnings grow, the 'E' increases, over time. That means unless the share price increases, the P/E will reduce in a few years. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
In the last year, Ten Entertainment Group grew EPS like Taylor Swift grew her fan base back in 2010; the 58% gain was both fast and well deserved. On the other hand, the longer term performance is poor, with EPS down 5.6% per year over 5 years.
Does Ten Entertainment Group 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. The image below shows that Ten Entertainment Group has a P/E ratio that is roughly in line with the hospitality industry average (18.2).
That indicates that the market expects Ten Entertainment Group will perform roughly in line with other companies in its industry. So if Ten Entertainment Group actually outperforms its peers going forward, that should be a positive for the share price. Further research into factors such asmanagement tenure, could help you form your own view on whether that is likely.
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. That means it doesn't take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
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.
Is Debt Impacting Ten Entertainment Group's P/E?
Ten Entertainment Group's net debt is 7.1% of its market cap. It would probably trade on a higher P/E ratio if it had a lot of cash, but I doubt it is having a big impact.
The Bottom Line On Ten Entertainment Group's P/E Ratio
Ten Entertainment Group's P/E is 18.2 which is above average (16.2) in the GB market. The company is not overly constrained by its modest debt levels, and its recent EPS growth is nothing short of stand-out. So to be frank we are not surprised it has a high P/E ratio.
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 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 Ten Entertainment Group. So you may wish to see this free collection of other companies that have grown earnings strongly.
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 email@example.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.