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Should You Be Tempted To Buy Atresmedia Corporación de Medios de Comunicación SA (BME:A3M) Because Of Its PE Ratio?

Petra Goodwin

I am writing today to help inform people who are new to the stock market and want to start learning about core concepts of fundamental analysis on practical examples from today’s market.

Atresmedia Corporación de Medios de Comunicación SA (BME:A3M) is currently trading at a trailing P/E of 10.4x, which is lower than the industry average of 15.8x. Although some investors may jump to the conclusion that this is a great buying opportunity, understanding the assumptions behind the P/E ratio might change your mind. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for.

See our latest analysis for Atresmedia Corporación de Medios de Comunicación

What you need to know about the P/E ratio

BME:A3M PE PEG Gauge September 11th 18

The P/E ratio is a popular ratio used in relative valuation since earnings power is a key driver of investment value. It compares a stock’s price per share to the stock’s earnings per share. A more intuitive way of understanding the P/E ratio is to think of it as how much investors are paying for each dollar of the company’s earnings.

P/E Calculation for A3M

Price-Earnings Ratio = Price per share ÷ Earnings per share

A3M Price-Earnings Ratio = €5.86 ÷ €0.563 = 10.4x

The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to A3M, such as capital structure and profitability. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. A3M’s P/E of 10.4 is lower than its industry peers (15.8), which implies that each dollar of A3M’s earnings is being undervalued by investors. Since the Media sector in ES is relatively small, I’ve included similar companies in the wider region in order to get a better idea of the multiple, which is a median of profitable companies of companies such as Vértice Trescientos Sesenta Grados, Mediaset España Comunicación and Zinkia Entertainment. One could put it like this: the market is pricing A3M as if it is a weaker company than the average company in its industry.

Assumptions to be aware of

Before you jump to conclusions it is important to realise that our assumptions rests on two assertions. Firstly, our peer group contains companies that are similar to A3M. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared lower risk firms with A3M, then investors would naturally value it at a lower price since it is a riskier investment. The second assumption that must hold true is that the stocks we are comparing A3M to are fairly valued by the market. If this does not hold, there is a possibility that A3M’s P/E is lower because our peer group is overvalued by the market.

What this means for you:

Since you may have already conducted your due diligence on A3M, the undervaluation of the stock may mean it is a good time to top up on your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I’ve outlined above. Remember that basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PE ratio is very one-dimensional. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:

  1. Future Outlook: What are well-informed industry analysts predicting for A3M’s future growth? Take a look at our free research report of analyst consensus for A3M’s outlook.
  2. Past Track Record: Has A3M been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of A3M’s historicals for more clarity.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.