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What Is CTS Eventim KGaA's (ETR:EVD) P/E Ratio After Its Share Price Rocketed?

Those holding CTS Eventim KGaA (ETR:EVD) shares must be pleased that the share price has rebounded 24% in the last thirty days. But unfortunately, the stock is still down by 34% over a quarter. But shareholders may not all be feeling jubilant, since the share price is still down 13% in the last year.

All else being equal, a sharp share price increase should make a stock less attractive to potential investors. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. So some would prefer to hold off buying when there is a lot of optimism towards a stock. Perhaps the simplest way to get a read on investors' expectations of a business is to look at its Price to Earnings Ratio (PE Ratio). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.

View our latest analysis for CTS Eventim KGaA

How Does CTS Eventim KGaA's P/E Ratio Compare To Its Peers?

CTS Eventim KGaA has a P/E ratio of 27.49. The image below shows that CTS Eventim KGaA has a P/E ratio that is roughly in line with the entertainment industry average (27.5).

XTRA:EVD Price Estimation Relative to Market April 16th 2020
XTRA:EVD Price Estimation Relative to Market April 16th 2020

Its P/E ratio suggests that CTS Eventim KGaA shareholders think that in the future it will perform about the same as other companies in its industry classification. The company could surprise by performing better than average, in the future. Checking factors such as director buying and selling. could help you form your own view on if that will happen.

How Growth Rates Impact P/E Ratios

Probably the most important factor in determining what P/E a company trades on is the earnings growth. Earnings growth means that in the future the 'E' will be higher. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

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CTS Eventim KGaA increased earnings per share by an impressive 12% over the last twelve months. And its annual EPS growth rate over 5 years is 11%. This could arguably justify a relatively high P/E ratio.

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. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).

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.

So What Does CTS Eventim KGaA's Balance Sheet Tell Us?

With net cash of €747m, CTS Eventim KGaA has a very strong balance sheet, which may be important for its business. Having said that, at 20% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.

The Verdict On CTS Eventim KGaA's P/E Ratio

CTS Eventim KGaA's P/E is 27.5 which is above average (16.9) in its market. Its net cash position supports a higher P/E ratio, as does its solid recent earnings growth. So it is not surprising the market is probably extrapolating recent growth well into the future, reflected in the relatively high P/E ratio. What is very clear is that the market has become significantly more optimistic about CTS Eventim KGaA over the last month, with the P/E ratio rising from 22.2 back then to 27.5 today. For those who prefer to invest with the flow of momentum, that might mean it's time to put the stock on a watchlist, or research it. But the contrarian may see it as a missed opportunity.

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. So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.

You might be able to find a better buy than CTS Eventim KGaA. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

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.