Why Entertainment Network (India) Limited’s (NSE:ENIL) High P/E Ratio Isn’t Necessarily A Bad Thing

This article is written for those who want to get better at using price to earnings ratios (P/E ratios). To keep it practical, we’ll show how Entertainment Network (India) Limited’s (NSE:ENIL) P/E ratio could help you assess the value on offer. Looking at earnings over the last twelve months, Entertainment Network (India) has a P/E ratio of 29.03. In other words, at today’s prices, investors are paying ₹29.03 for every ₹1 in prior year profit.

View our latest analysis for Entertainment Network (India)

How Do You Calculate Entertainment Network (India)’s P/E Ratio?

The formula for P/E is:

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

Or for Entertainment Network (India):

P/E of 29.03 = ₹241.05 ÷ ₹8.30 (Based on the year to September 2019.)

Is A High P/E Ratio Good?

A higher P/E ratio means that buyers have to pay a higher price for each ₹1 the company has earned over the last year. That isn’t a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business’s prospects, relative to stocks with a lower P/E.

Does Entertainment Network (India) Have A Relatively High Or Low P/E For Its Industry?

One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. As you can see below, Entertainment Network (India) has a higher P/E than the average company (12.0) in the media industry.

NSEI:ENIL Price Estimation Relative to Market, December 24th 2019
NSEI:ENIL Price Estimation Relative to Market, December 24th 2019

Entertainment Network (India)’s P/E tells us that market participants think the company will perform better than its industry peers, going forward. Clearly the market expects growth, but it isn’t guaranteed. So further research is always essential. I often monitor director buying and selling.

How Growth Rates Impact P/E Ratios

When earnings fall, the ‘E’ decreases, over time. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.

Entertainment Network (India)’s earnings per share fell by 8.7% in the last twelve months. And EPS is down 16% a year, over the last 5 years. So you wouldn’t expect a very high P/E.

Remember: P/E Ratios Don’t Consider The Balance Sheet

It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. That means it doesn’t take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

While growth expenditure doesn’t always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.

Is Debt Impacting Entertainment Network (India)’s P/E?

Entertainment Network (India) has net cash of ₹1.8b. This is fairly high at 15% of its market capitalization. That might mean balance sheet strength is important to the business, but should also help push the P/E a bit higher than it would otherwise be.

The Verdict On Entertainment Network (India)’s P/E Ratio

Entertainment Network (India) has a P/E of 29.0. That’s higher than the average in its market, which is 13.0. The recent drop in earnings per share would make some investors cautious, but the net cash position means the company has time to improve: and the high P/E suggests the market thinks it will.

Investors should be looking to buy stocks that the market is wrong about. 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 free visual report on analyst forecasts could hold the key to an excellent investment decision.

Of course you might be able to find a better stock than Entertainment Network (India). So you may wish to see this free collection of other companies that have grown earnings strongly.

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.