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 Music Broadcast Limited’s (NSE:RADIOCITY) P/E ratio to inform your assessment of the investment opportunity. Looking at earnings over the last twelve months, Music Broadcast has a P/E ratio of 27.84. That corresponds to an earnings yield of approximately 3.6%.
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How Do You Calculate Music Broadcast’s P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Music Broadcast:
P/E of 27.84 = ₹58.5 ÷ ₹2.1 (Based on the trailing twelve months to December 2018.)
Is A High Price-to-Earnings 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 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
Generally speaking the rate of earnings growth has a profound impact on a company’s P/E multiple. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.
Music Broadcast increased earnings per share by a whopping 43% last year. And its annual EPS growth rate over 5 years is 11%. I’d therefore be a little surprised if its P/E ratio was not relatively high.
How Does Music Broadcast’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. As you can see below, Music Broadcast has a higher P/E than the average company (14.5) in the media industry.
That means that the market expects Music Broadcast will outperform other companies in its industry. The market is optimistic about the future, but that doesn’t guarantee future growth. So investors should delve deeper. I like to check if company insiders have been buying or selling.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. 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.
Is Debt Impacting Music Broadcast’s P/E?
Since Music Broadcast holds net cash of ₹724m, it can spend on growth, justifying a higher P/E ratio than otherwise.
The Verdict On Music Broadcast’s P/E Ratio
Music Broadcast trades on a P/E ratio of 27.8, which is above the IN market average of 15.5. Its net cash position is the cherry on top of its superb EPS growth. So based on this analysis we’d expect Music Broadcast to have a high P/E ratio.
Investors have an opportunity when market expectations about a stock are wrong. 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.
But note: Music Broadcast 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).
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 firstname.lastname@example.org. 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.