Does Emirates Telecommunications Group Company PJSC (ADX:ETISALAT) Have A Good P/E Ratio?

This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to Emirates Telecommunications Group Company PJSC's (ADX:ETISALAT), to help you decide if the stock is worth further research. What is Emirates Telecommunications Group Company PJSC's P/E ratio? Well, based on the last twelve months it is 15.80. That means that at current prices, buyers pay AED15.80 for every AED1 in trailing yearly profits.

Check out our latest analysis for Emirates Telecommunications Group Company PJSC

How Do I Calculate Emirates Telecommunications Group Company PJSC's Price To Earnings Ratio?

The formula for price to earnings is:

Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)

Or for Emirates Telecommunications Group Company PJSC:

P/E of 15.80 = AED16.42 ÷ AED1.04 (Based on the trailing twelve months to September 2019.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio implies that investors pay a higher price for the earning power of the business. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.

How Does Emirates Telecommunications Group Company PJSC's P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. If you look at the image below, you can see Emirates Telecommunications Group Company PJSC has a lower P/E than the average (19.0) in the telecom industry classification.

Emirates Telecommunications Group Company PJSC's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Many investors like to buy stocks when the market is pessimistic about their prospects. You should delve deeper. I like to check if company insiders have been buying or selling.

How Growth Rates Impact P/E Ratios

Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. That means even if the current P/E is low, it will increase over time if the share price stays flat. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.

Emirates Telecommunications Group Company PJSC saw earnings per share improve by -4.6% last year. And its annual EPS growth rate over 5 years is 2.8%.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

The 'Price' in P/E reflects the market capitalization of the company. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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 Emirates Telecommunications Group Company PJSC's Balance Sheet Tell Us?

The extra options and safety that comes with Emirates Telecommunications Group Company PJSC's د.إ2.3b net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.

The Verdict On Emirates Telecommunications Group Company PJSC's P/E Ratio

Emirates Telecommunications Group Company PJSC's P/E is 15.8 which is above average (10.4) in its market. EPS was up modestly better over the last twelve months. Also positive, the relatively strong balance sheet will allow for investment in growth -- and the P/E indicates shareholders that will happen!

Investors have an opportunity when market expectations about a stock are wrong. 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.

You might be able to find a better buy than Emirates Telecommunications Group Company PJSC. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

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.