How Does Nine Entertainment Holdings’s (ASX:NEC) P/E Compare To Its Industry, After The Share Price Drop?

Unfortunately for some shareholders, the Nine Entertainment Holdings (ASX:NEC) share price has dived 30% in the last thirty days. The recent drop has obliterated the annual return, with the share price now down 23% over that longer period.

Assuming nothing else has changed, a lower share price makes a stock more attractive to potential buyers. In the long term, share prices tend to follow earnings per share, but in the short term prices bounce around in response to short term factors (which are not always obvious). The implication here is that long term investors have an opportunity when expectations of a company are too low. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). A high P/E implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.

Check out our latest analysis for Nine Entertainment Holdings

How Does Nine Entertainment Holdings’s P/E Ratio Compare To Its Peers?

Nine Entertainment Holdings’s P/E of 15.03 indicates relatively low sentiment towards the stock. We can see in the image below that the average P/E (24.6) for companies in the media industry is higher than Nine Entertainment Holdings’s P/E.

ASX:NEC Price Estimation Relative to Market, March 9th 2020
ASX:NEC Price Estimation Relative to Market, March 9th 2020

Its relatively low P/E ratio indicates that Nine Entertainment Holdings shareholders think it will struggle to do as well as other companies in its industry classification. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. If earnings are growing quickly, then the ‘E’ in the equation will increase faster than it would otherwise. That means unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.

Nine Entertainment Holdings’s earnings per share fell by 61% in the last twelve months. But over the longer term (5 years) earnings per share have increased by 2.6%.

Remember: P/E Ratios Don’t Consider The Balance Sheet

Don’t forget that the P/E ratio considers market capitalization. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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.

How Does Nine Entertainment Holdings’s Debt Impact Its P/E Ratio?

Nine Entertainment Holdings has net debt worth 18% of its market capitalization. That’s enough debt to impact the P/E ratio a little; so keep it in mind if you’re comparing it to companies without debt.

The Bottom Line On Nine Entertainment Holdings’s P/E Ratio

Nine Entertainment Holdings’s P/E is 15.0 which is below average (17.0) in the AU market. Since it only carries a modest debt load, it’s likely the low expectations implied by the P/E ratio arise from the lack of recent earnings growth. What can be absolutely certain is that the market has become significantly less optimistic about Nine Entertainment Holdings over the last month, with the P/E ratio falling from 21.5 back then to 15.0 today. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for a contrarian, it may signal opportunity.

When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

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.

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. Thank you for reading.