Is Zee Entertainment Enterprises Limited's (NSE:ZEEL) High P/E Ratio A Problem For Investors?

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 Zee Entertainment Enterprises Limited's (NSE:ZEEL) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Zee Entertainment Enterprises's P/E ratio is 14.95. That means that at current prices, buyers pay ₹14.95 for every ₹1 in trailing yearly profits.

View our latest analysis for Zee Entertainment Enterprises

How Do I Calculate Zee Entertainment Enterprises's Price To Earnings Ratio?

The formula for P/E is:

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

Or for Zee Entertainment Enterprises:

P/E of 14.95 = ₹279.90 ÷ ₹18.73 (Based on the trailing twelve months to September 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. 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 Does Zee Entertainment Enterprises's P/E Ratio Compare To Its Peers?

One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. You can see in the image below that the average P/E (12.6) for companies in the media industry is lower than Zee Entertainment Enterprises's P/E.

That means that the market expects Zee Entertainment Enterprises will outperform other companies in its industry.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. And in that case, the P/E ratio itself will drop rather quickly. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

Zee Entertainment Enterprises increased earnings per share by a whopping 36% last year. And its annual EPS growth rate over 5 years is 18%. With that performance, I would expect it to have an above average P/E ratio. Shareholders have some reason to be optimistic, but the future is always uncertain. 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. 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.

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 Zee Entertainment Enterprises's Debt Impact Its P/E Ratio?

Zee Entertainment Enterprises has net cash of ₹17b. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.

The Verdict On Zee Entertainment Enterprises's P/E Ratio

Zee Entertainment Enterprises's P/E is 14.9 which is above average (13.0) in its market. Its net cash position is the cherry on top of its superb EPS growth. So based on this analysis we'd expect Zee Entertainment Enterprises to have a high P/E ratio.

Investors have an opportunity when market expectations about a stock are wrong. 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. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

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.

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.