Do You Like Swisscom AG (VTX:SCMN) At This P/E Ratio?
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Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll apply a basic P/E ratio analysis to Swisscom AG's (VTX:SCMN), to help you decide if the stock is worth further research. Swisscom has a price to earnings ratio of 16.52, based on the last twelve months. That corresponds to an earnings yield of approximately 6.1%.
View our latest analysis for Swisscom
How Do I Calculate Swisscom's Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Swisscom:
P/E of 16.52 = CHF488.2 ÷ CHF29.56 (Based on the trailing twelve months to March 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 CHF1 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.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. And in that case, the P/E ratio itself will drop rather quickly. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Swisscom saw earnings per share decrease by 3.0% last year. But over the longer term (3 years), earnings per share have increased by 3.6%. And EPS is down 1.7% a year, over the last 5 years. So we might expect a relatively low P/E.
Does Swisscom Have A Relatively High Or Low P/E For Its Industry?
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 Swisscom has a lower P/E than the average (22.2) in the telecom industry classification.
Its relatively low P/E ratio indicates that Swisscom shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Swisscom, 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.
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. 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.
Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).
So What Does Swisscom's Balance Sheet Tell Us?
Swisscom's net debt equates to 35% of its market capitalization. While that's enough to warrant consideration, it doesn't really concern us.
The Verdict On Swisscom's P/E Ratio
Swisscom has a P/E of 16.5. That's below the average in the CH market, which is 18.2. 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. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free report on the analyst consensus forecasts could help you make a master move on this stock.
But note: Swisscom 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.
