Yahoo Finance Here's What AdEPT Telecom plc's (LON:ADT) P/E Ratio Is Telling Us
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This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). To keep it practical, we'll show how AdEPT Telecom plc's (LON:ADT) P/E ratio could help you assess the value on offer. AdEPT Telecom has a P/E ratio of 20.43, based on the last twelve months. That is equivalent to an earnings yield of about 4.9%.
Check out our latest analysis for AdEPT Telecom
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for AdEPT Telecom:
P/E of 20.43 = £3.3 ÷ £0.16 (Based on the year to September 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 isn't a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business's prospects, relative to stocks with a lower P/E.
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. 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. Then, a lower P/E should attract more buyers, pushing the share price up.
AdEPT Telecom increased earnings per share by a whopping 25% last year. And its annual EPS growth rate over 5 years is 25%. So we'd generally expect it to have a relatively high P/E ratio.
Does AdEPT Telecom Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio indicates whether the market has higher or lower expectations of a company. You can see in the image below that the average P/E (20.5) for companies in the telecom industry is roughly the same as AdEPT Telecom's P/E.
Its P/E ratio suggests that AdEPT Telecom shareholders think that in the future it will perform about the same as other companies in its industry classification. So if AdEPT Telecom actually outperforms its peers going forward, that should be a positive for the share price. Further research into factors such asmanagement tenure, could help you form your own view on whether that is likely.
Remember: P/E Ratios Don't Consider The Balance Sheet
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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).
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 AdEPT Telecom's Debt Impact Its P/E Ratio?
Net debt is 40% of AdEPT Telecom's market cap. While it's worth keeping this in mind, it isn't a worry.
The Verdict On AdEPT Telecom's P/E Ratio
AdEPT Telecom has a P/E of 20.4. That's higher than the average in the GB market, which is 16.4. While the company does use modest debt, its recent earnings growth is very good. Therefore, it's not particularly surprising that it has a above average P/E ratio.
Investors should be looking to buy stocks that the market is wrong about. 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: AdEPT Telecom 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 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.
