The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll look at Atresmedia Corporación de Medios de Comunicación, S.A.’s (BME:A3M) P/E ratio and reflect on what it tells us about the company’s share price. Based on the last twelve months, Atresmedia Corporación de Medios de Comunicación’s P/E ratio is 7.58. That means that at current prices, buyers pay €7.58 for every €1 in trailing yearly profits.
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How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Atresmedia Corporación de Medios de Comunicación:
P/E of 7.58 = €4.27 ÷ €0.56 (Based on the trailing twelve months to September 2018.)
Is A High P/E Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. All else being equal, it’s better to pay a low price — but as Warren Buffett said, ‘It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.’
How Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. When earnings grow, the ‘E’ increases, over time. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. Then, a lower P/E should attract more buyers, pushing the share price up.
Atresmedia Corporación de Medios de Comunicación shrunk earnings per share by 1.6% last year. But over the longer term (5 years) earnings per share have increased by 25%.
How Does Atresmedia Corporación de Medios de Comunicación’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 Atresmedia Corporación de Medios de Comunicación has a lower P/E than the average (16.2) in the media industry classification.
This suggests that market participants think Atresmedia Corporación de Medios de Comunicación will underperform other companies in its industry. Since the market seems unimpressed with Atresmedia Corporación de Medios de Comunicación, it’s quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
Remember: P/E Ratios Don’t Consider The Balance Sheet
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. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
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).
How Does Atresmedia Corporación de Medios de Comunicación’s Debt Impact Its P/E Ratio?
Net debt totals 21% of Atresmedia Corporación de Medios de Comunicación’s market cap. 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 Atresmedia Corporación de Medios de Comunicación’s P/E Ratio
Atresmedia Corporación de Medios de Comunicación has a P/E of 7.6. That’s below the average in the ES market, which is 17.4. 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.
Investors have an opportunity when market expectations about a stock are wrong. 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 visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.
But note: Atresmedia Corporación de Medios de Comunicación 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).
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 email@example.com.