Yahoo Finance Read This Before You Buy ITV plc (LON:ITV) Because Of Its P/E Ratio
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The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at ITV plc's (LON:ITV) P/E ratio and reflect on what it tells us about the company's share price. ITV has a price to earnings ratio of 11.62, based on the last twelve months. That is equivalent to an earnings yield of about 8.6%.
View our latest analysis for ITV
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for ITV:
P/E of 11.62 = £1.35 ÷ £0.12 (Based on the trailing twelve months to December 2018.)
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. 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
If earnings fall then in the future the 'E' will be lower. That means even if the current P/E is low, it will increase over time if the share price stays flat. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.
ITV increased earnings per share by an impressive 14% over the last twelve months. And earnings per share have improved by 7.0% annually, over the last five years. This could arguably justify a relatively high P/E ratio. In contrast, EPS has decreased by 1.9%, annually, over 3 years.
How Does ITV's P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. We can see in the image below that the average P/E (22.1) for companies in the media industry is higher than ITV's P/E.
ITV's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with ITV, it's quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
Remember: P/E Ratios Don't Consider The Balance Sheet
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. 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 ITV's Balance Sheet Tell Us?
Net debt totals 18% of ITV'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 Verdict On ITV's P/E Ratio
ITV trades on a P/E ratio of 11.6, which is below the GB market average of 16.4. The company does have a little debt, and EPS growth was good last year. If the company can continue to grow earnings, then the current P/E may be unjustifiably low.
When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
But note: ITV 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.
