Yahoo Finance A Sliding Share Price Has Us Looking At World Wrestling Entertainment, Inc.'s (NYSE:WWE) P/E Ratio
Unfortunately for some shareholders, the World Wrestling Entertainment (NYSE:WWE) share price has dived 31% in the last thirty days. Indeed the recent decline has arguably caused some bitterness for shareholders who have held through the 52% drop over twelve months.
All else being equal, a share price drop should make a stock more attractive to potential investors. In the long term, share prices tend to follow earnings per share, but in the short term prices bounce around in response to short term factors (which are not always obvious). The implication here is that long term investors have an opportunity when expectations of a company are too low. 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.
Check out our latest analysis for World Wrestling Entertainment
Does World Wrestling Entertainment Have A Relatively High Or Low P/E For Its Industry?
We can tell from its P/E ratio of 42.65 that there is some investor optimism about World Wrestling Entertainment. You can see in the image below that the average P/E (25.0) for companies in the entertainment industry is lower than World Wrestling Entertainment's P/E.
Its relatively high P/E ratio indicates that World Wrestling Entertainment shareholders think it will perform better than other companies in its industry classification. Shareholders are clearly optimistic, but the future is always uncertain. So investors should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. 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.
World Wrestling Entertainment shrunk earnings per share by 23% over the last year. But it has grown its earnings per share by 30% per year over the last three years.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
The 'Price' in P/E reflects the market capitalization of the company. Thus, the metric does not reflect cash or debt held by the company. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.
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.
Is Debt Impacting World Wrestling Entertainment's P/E?
Since World Wrestling Entertainment holds net cash of US$36m, it can spend on growth, justifying a higher P/E ratio than otherwise.
The Verdict On World Wrestling Entertainment's P/E Ratio
World Wrestling Entertainment trades on a P/E ratio of 42.6, which is above its market average of 18.4. The recent drop in earnings per share might keep value investors away, but the relatively strong balance sheet will allow the company time to invest in growth. Clearly, the high P/E indicates shareholders think it will! Given World Wrestling Entertainment's P/E ratio has declined from 61.6 to 42.6 in the last month, we know for sure that the market is significantly less confident about the business today, than it was back then. For those who don't like to trade against momentum, that could be a warning sign, but a contrarian investor might want to take a closer look.
When the market is wrong about a stock, it gives savvy investors an opportunity. 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.
You might be able to find a better buy than World Wrestling Entertainment. 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.
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