Here's How P/E Ratios Can Help Us Understand Atresmedia Corporación de Medios de Comunicación, S.A. (BME:A3M)

This article is written for those who want to get better at using 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. Looking at earnings over the last twelve months, Atresmedia Corporación de Medios de Comunicación has a P/E ratio of 8.28. That means that at current prices, buyers pay €8.28 for every €1 in trailing yearly profits.

Check out our latest analysis for Atresmedia Corporación de Medios de Comunicación

How Do You Calculate A P/E Ratio?

The formula for P/E is:

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

Or for Atresmedia Corporación de Medios de Comunicación:

P/E of 8.28 = EUR3.03 ÷ EUR0.37 (Based on the trailing twelve months to September 2019.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that buyers have to pay a higher price for each EUR1 the company has earned over the last year. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.

Does Atresmedia Corporación de Medios de Comunicación Have A Relatively High Or Low P/E For Its Industry?

We can get an indication of market expectations by looking at the P/E ratio. We can see in the image below that the average P/E (19.1) for companies in the media industry is higher than Atresmedia Corporación de Medios de Comunicación's P/E.

Atresmedia Corporación de Medios de Comunicación's P/E tells us that market participants think it will not fare as well as its peers in the same industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. 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

Earnings growth rates have a big influence on P/E ratios. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Atresmedia Corporación de Medios de Comunicación saw earnings per share decrease by 23% last year.

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

The 'Price' in P/E reflects the market capitalization of the company. Thus, the metric does not reflect cash or debt held by the company. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its 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.

How Does Atresmedia Corporación de Medios de Comunicación's Debt Impact Its P/E Ratio?

Net debt is 29% of Atresmedia Corporación de Medios de Comunicación's market cap. While it's worth keeping this in mind, it isn't a worry.

The Bottom Line On Atresmedia Corporación de Medios de Comunicación's P/E Ratio

Atresmedia Corporación de Medios de Comunicación trades on a P/E ratio of 8.3, which is below the ES market average of 17.1. The debt levels are not a major concern, but the lack of EPS growth is likely weighing on sentiment.

When the market is wrong about a stock, it gives savvy investors an opportunity. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

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).

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.