Music Broadcast Limited’s (NSE:RADIOCITY) price-to-earnings (or “P/E”) ratio of 21.3x might make it look like a strong sell right now compared to the market in India, where around half of the companies have P/E ratios below 12x and even P/E’s below 6x are quite common. Nonetheless, we’d need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.
As an illustration, earnings have deteriorated at Music Broadcast over the last year, which is not ideal at all. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.
Where Does Music Broadcast’s P/E Sit Within Its Industry?
It’s plausible that Music Broadcast’s particularly high P/E ratio could be a result of tendencies within its own industry. You’ll notice in the figure below that P/E ratios in the Media industry are lower than the market. So we’d say there is practically no merit in the premise that the company’s ratio being shaped by its industry at this time. In the context of the Media industry’s current setting, most of its constituents’ P/E’s would be expected to be toned down. Still, the strength of the company’s earnings will most likely determine where its P/E shall sit.Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Music Broadcast will help you shine a light on its historical performance.
What Are Growth Metrics Telling Us About The High P/E?
Music Broadcast’s P/E ratio would be typical for a company that’s expected to deliver very strong growth, and importantly, perform much better than the market.
Taking a look back first, the company’s earnings per share growth last year wasn’t something to get excited about as it posted a disappointing decline of 53%. This means it has also seen a slide in earnings over the longer-term as EPS is down 36% in total over the last three years. Therefore, it’s fair to say the earnings growth recently has been undesirable for the company.
This is in contrast to the rest of the market, which is expected to decline by 6.7% over the next year, or less than the company’s recent medium-term annualised earnings decline.
With this information, it’s strange that Music Broadcast is trading at a higher P/E in comparison. In general, when earnings shrink rapidly the P/E premium often shrinks too, which could set up shareholders for future disappointment. There’s potential for the P/E to fall to lower levels if the company doesn’t improve its profitability, which would be difficult to do with the current market outlook.
The Key Takeaway
Using the price-to-earnings ratio alone to determine if you should sell your stock isn’t sensible, however it can be a practical guide to the company’s future prospects.
Our examination of Music Broadcast revealed its sharp three-year contraction in earnings isn’t impacting its high P/E anywhere near as much as we would have predicted, given the market is set to shrink less severely. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is unlikely to support such positive sentiment for long. In addition, we would be concerned whether the company can even maintain its medium-term level of performance under these tough market conditions. This would place shareholders’ investments at significant risk and potential investors in danger of paying an excessive premium.
We don’t want to rain on the parade too much, but we did also find 4 warning signs for Music Broadcast that you need to be mindful of.
If these risks are making you reconsider your opinion on Music Broadcast, explore our interactive list of high quality stocks to get an idea of what else is out there.
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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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