The goal of this article is to teach you how to use 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. Eros International Media has a price to earnings ratio of 2.93, based on the last twelve months. That corresponds to an earnings yield of approximately 34%.
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How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Eros International Media:
P/E of 2.93 = ₹81 ÷ ₹27.63 (Based on the year to September 2018.)
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. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
How Growth Rates Impact P/E Ratios
Companies that shrink earnings per share quickly will rapidly decrease the ‘E’ in the equation. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. Then, a higher P/E might scare off shareholders, pushing the share price down.
Eros International Media increased earnings per share by 8.7% last year. And its annual EPS growth rate over 5 years is 2.9%. In contrast, EPS has decreased by 2.8%, annually, over 3 years.
How Does Eros International Media’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 Eros International Media has a lower P/E than the average (25.3) P/E for companies in the entertainment industry.
Its relatively low P/E ratio indicates that Eros International Media shareholders think it will struggle to do as well as other companies in its industry classification. Many investors like to buy stocks when the market is pessimistic about their prospects. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
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.
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
How Does Eros International Media’s Debt Impact Its P/E Ratio?
Eros International Media has net debt worth 75% of its market capitalization. If you want to compare its P/E ratio to other companies, you should absolutely keep in mind it has significant borrowings.
The Verdict On Eros International Media’s P/E Ratio
Eros International Media’s P/E is 2.9 which is below average (17.1) in the IN market. The meaningful debt load is probably contributing to low expectations, even though it has improved earnings recently.
Investors have an opportunity when market expectations about a stock are wrong. 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.
Of course you might be able to find a better stock than Eros International Media. So you may wish to see this free collection of other companies that have grown earnings strongly.
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.