Do You Like Eros International Media Limited (NSE:EROSMEDIA) At This P/E Ratio?

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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll look at Eros International Media Limited’s (NSE:EROSMEDIA) P/E ratio and reflect on what it tells us about the company’s share price. What is Eros International Media’s P/E ratio? Well, based on the last twelve months it is 0.61. In other words, at today’s prices, investors are paying ₹0.61 for every ₹1 in prior year profit.

Check out our latest analysis for Eros International Media

How Do I Calculate A Price To Earnings Ratio?

The formula for P/E is:

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

Or for Eros International Media:

P/E of 0.61 = ₹17.2 ÷ ₹28.26 (Based on the trailing twelve months to March 2019.)

Is A High Price-to-Earnings Ratio Good?

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

Earnings growth rates have a big influence on P/E ratios. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. That means even if the current P/E is high, it will reduce over time if the share price stays flat. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Most would be impressed by Eros International Media earnings growth of 16% in the last year. And it has bolstered its earnings per share by 5.4% per year over the last five years. So one might expect an above average P/E ratio.

Does Eros International Media 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. The image below shows that Eros International Media has a lower P/E than the average (43.1) P/E for companies in the entertainment industry.

NSEI:EROSMEDIA Price Estimation Relative to Market, July 2nd 2019
NSEI:EROSMEDIA Price Estimation Relative to Market, July 2nd 2019

This suggests that market participants think Eros International Media will underperform other companies in its industry.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

Don’t forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. 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).

So What Does Eros International Media’s Balance Sheet Tell Us?

Eros International Media has net debt worth a very significant 258% of its market capitalization. This level of debt justifies a relatively low P/E, so remain cognizant of the debt, if you’re comparing it to other stocks.

The Bottom Line On Eros International Media’s P/E Ratio

Eros International Media has a P/E of 0.6. That’s below the average in the IN market, which is 15.3. While the EPS growth last year was strong, the significant debt levels reduce the number of options available to management. If the company can continue to grow earnings, then the current P/E may be unjustifiably low.

When the market is wrong about a stock, it gives savvy investors an opportunity. As value investor Benjamin Graham famously said, ‘In the short run, the market is a voting machine but in the long run, it is a weighing machine.’ We don’t have analyst forecasts, but you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

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.