Yahoo Finance Here’s How P/E Ratios Can Help Us Understand Entertainment One Ltd (LON:ETO)
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll look at Entertainment One Ltd’s (LON:ETO) P/E ratio and reflect on what it tells us about the company’s share price. Entertainment One has a P/E ratio of 26, based on the last twelve months. That is equivalent to an earnings yield of about 3.8%.
Check out our latest analysis for Entertainment One
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 Entertainment One:
P/E of 26 = £3.84 ÷ £0.15 (Based on the trailing twelve months to March 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. All else being equal, it’s better to pay a low price — but as Warren Buffett said, ‘It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.’
How Growth Rates Impact P/E Ratios
When earnings fall, the ‘E’ decreases, over time. That means even if the current P/E is low, it will increase over time if the share price stays flat. Then, a higher P/E might scare off shareholders, pushing the share price down.
Notably, Entertainment One grew EPS by a whopping 438% in the last year. And it has bolstered its earnings per share by 13% per year over the last five years. With that performance, I would expect it to have an above average P/E ratio. In contrast, EPS has decreased by 26%, annually, over 3 years.
How Does Entertainment One’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. If you look at the image below, you can see Entertainment One has a lower P/E than the average (29.9) in the entertainment industry classification.
Its relatively low P/E ratio indicates that Entertainment One 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. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. That means it doesn’t take debt or cash into account. Theoretically, a business can improve its earnings (and produce a lower P/E in the future), by taking on debt (or spending its remaining 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 Entertainment One’s Debt Impact Its P/E Ratio?
Net debt totals 24% of Entertainment One’s market cap. That’s enough debt to impact the P/E ratio a little; so keep it in mind if you’re comparing it to companies without debt.
The Bottom Line On Entertainment One’s P/E Ratio
Entertainment One has a P/E of 26. That’s higher than the average in the GB market, which is 15.9. While the company does use modest debt, its recent earnings growth is impressive. Therefore it seems reasonable that the market would have relatively high expectations of the company
Investors have an opportunity when market expectations about a stock are wrong. People often underestimate remarkable growth — so investors can make money when fast growth is not fully appreciated. So this free report on the analyst consensus forecasts could help you make a master move on this stock.
But note: Entertainment One 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).
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 editorial-team@simplywallst.com.
