Here's What ADLPartner's (EPA:ALP) P/E Ratio Is Telling Us

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This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll show how you can use ADLPartner's (EPA:ALP) P/E ratio to inform your assessment of the investment opportunity. ADLPartner has a price to earnings ratio of 9.08, based on the last twelve months. That is equivalent to an earnings yield of about 11%.

See our latest analysis for ADLPartner

How Do I Calculate A Price To Earnings Ratio?

The formula for price to earnings is:

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

Or for ADLPartner:

P/E of 9.08 = €14.35 ÷ €1.58 (Based on the year to June 2018.)

Is A High P/E Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each €1 of company earnings. 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

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.

ADLPartner increased earnings per share by a whopping 36% last year. And earnings per share have improved by 5.7% annually, over the last three years. I'd therefore be a little surprised if its P/E ratio was not relatively high. Unfortunately, earnings per share are down 17% a year, over 5 years.

How Does ADLPartner's P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that ADLPartner has a lower P/E than the average (12.4) P/E for companies in the media industry.

Its relatively low P/E ratio indicates that ADLPartner shareholders think it will struggle to do as well as other companies in its industry classification. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. You should delve deeper. I like to check if company insiders have been buying or 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. 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).

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 ADLPartner's Debt Impact Its P/E Ratio?

Since ADLPartner holds net cash of €28m, it can spend on growth, justifying a higher P/E ratio than otherwise.

The Verdict On ADLPartner's P/E Ratio

ADLPartner has a P/E of 9.1. That's below the average in the FR market, which is 15.3. The net cash position gives plenty of options to the business, and the recent improvement in EPS is good to see. One might conclude that the market is a bit pessimistic, given the low P/E ratio.

Investors should be looking to buy stocks that the market is wrong about. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. Although we don't have analyst forecasts, shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.

Of course you might be able to find a better stock than ADLPartner. So you may wish to see this freecollection of other companies that have grown earnings strongly.

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.

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. Thank you for reading.