Here's What Mediagrif Interactive Technologies Inc.'s (TSE:MDF) P/E Ratio Is Telling Us

The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at Mediagrif Interactive Technologies Inc.'s (TSE:MDF) P/E ratio and reflect on what it tells us about the company's share price. Based on the last twelve months, Mediagrif Interactive Technologies's P/E ratio is 16.53. That corresponds to an earnings yield of approximately 6.1%.

View our latest analysis for Mediagrif Interactive Technologies

How Do You Calculate A P/E Ratio?

The formula for price to earnings is:

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

Or for Mediagrif Interactive Technologies:

P/E of 16.53 = CA$9.64 ÷ CA$0.58 (Based on the trailing twelve months to September 2018.)

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 isn't necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.

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. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.

Mediagrif Interactive Technologies's earnings per share fell by 25% in the last twelve months. And over the longer term (5 years) earnings per share have decreased 5.8% annually. This might lead to muted expectations.

How Does Mediagrif Interactive Technologies's P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. If you look at the image below, you can see Mediagrif Interactive Technologies has a lower P/E than the average (24.7) in the interactive media and services industry classification.

Its relatively low P/E ratio indicates that Mediagrif Interactive Technologies shareholders think it will struggle to do as well as other companies in its industry classification. 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.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

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. Theoretically, a business can improve its earnings (and produce a lower P/E in the future), by taking on debt (or spending its remaining cash).

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.

Is Debt Impacting Mediagrif Interactive Technologies's P/E?

Mediagrif Interactive Technologies's net debt is 11% of its market cap. It would probably deserve a higher P/E ratio if it was net cash, since it would have more options for growth.

The Verdict On Mediagrif Interactive Technologies's P/E Ratio

Mediagrif Interactive Technologies trades on a P/E ratio of 16.5, which is above the CA market average of 13.1. With some debt but no EPS growth last year, the market has high expectations of future profits.

When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. So this freevisual report on analyst forecasts could hold they key to an excellent investment decision.

But note: Mediagrif Interactive Technologies may not be the best stock to buy. So take a peek at this freelist of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

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.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.