The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll show how you can use Métropole Télévision S.A.’s (EPA:MMT) P/E ratio to inform your assessment of the investment opportunity. Métropole Télévision has a P/E ratio of 11.32, based on the last twelve months. That corresponds to an earnings yield of approximately 8.8%.
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 Métropole Télévision:
P/E of 11.32 = €15.68 ÷ €1.39 (Based on the year to December 2018.)
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 is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
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. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. Then, a lower P/E should attract more buyers, pushing the share price up.
Métropole Télévision saw earnings per share improve by -7.8% last year. And its annual EPS growth rate over 5 years is 7.9%.
How Does Métropole Télévision’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. We can see in the image below that the average P/E (12.3) for companies in the media industry is higher than Métropole Télévision’s P/E.
Its relatively low P/E ratio indicates that Métropole Télévision shareholders think it will struggle to do as well as other companies in its industry classification. Many investors like to buy stocks when the market is pessimistic about their prospects. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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.
Métropole Télévision’s Balance Sheet
The extra options and safety that comes with Métropole Télévision’s €81m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.
The Verdict On Métropole Télévision’s P/E Ratio
Métropole Télévision has a P/E of 11.3. That’s below the average in the FR market, which is 15.5. EPS was up modestly better over the last twelve months. And the net cash position gives the company many options. So it’s strange that the low P/E indicates low expectations.
When the market is wrong about a stock, it gives savvy investors an opportunity. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
Of course you might be able to find a better stock than Métropole Télévision. 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.