To the annoyance of some shareholders, Nine Entertainment Holdings (ASX:NEC) shares are down a considerable 52% in the last month. That drop has capped off a tough year for shareholders, with the share price down 49% in that time.
All else being equal, a share price drop should make a stock more attractive to potential investors. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. The implication here is that long term investors have an opportunity when expectations of a company are too low. Perhaps the simplest way to get a read on investors’ expectations of a business 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
Does Nine Entertainment Holdings Have A Relatively High Or Low P/E For Its Industry?
We can tell from its P/E ratio of 9.71 that sentiment around Nine Entertainment Holdings isn’t particularly high. We can see in the image below that the average P/E (16.2) for companies in the media industry is higher than Nine Entertainment Holdings’s P/E.
This suggests that market participants think Nine Entertainment Holdings will underperform other companies in its industry. Since the market seems unimpressed with Nine Entertainment Holdings, 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.
How Growth Rates Impact P/E Ratios
Generally speaking the rate of earnings growth has a profound impact on a company’s P/E multiple. Earnings growth means that in the future the ‘E’ will be higher. That means even if the current P/E is high, it will reduce over time if the share price stays flat. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.
Nine Entertainment Holdings saw earnings per share decrease by 61% last year. But over the longer term (5 years) earnings per share have increased by 2.6%.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
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.
While growth expenditure doesn’t always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.
Is Debt Impacting Nine Entertainment Holdings’s P/E?
Nine Entertainment Holdings has net debt equal to 26% of its market cap. While that’s enough to warrant consideration, it doesn’t really concern us.
The Verdict On Nine Entertainment Holdings’s P/E Ratio
Nine Entertainment Holdings’s P/E is 9.7 which is below average (12.6) in the AU market. The debt levels are not a major concern, but the lack of EPS growth is likely weighing on sentiment. Given Nine Entertainment Holdings’s P/E ratio has declined from 20.1 to 9.7 in the last month, we know for sure that the market is more worried about the business today, than it was back then. For those who prefer invest in growth, this stock apparently offers limited promise, but the deep value investors may find the pessimism around this stock enticing.
Investors should be looking to buy stocks that the market is wrong about. As value investor Benjamin Graham famously said, ‘In the short run, the market is a voting machine but in the long run, it is a weighing machine. So this free report on the analyst consensus forecasts could help you make a master move on this stock.
But note: Nine Entertainment Holdings 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).
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.
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