Advertisement
UK markets close in 2 hours 27 minutes
  • FTSE 100

    7,963.30
    +31.32 (+0.39%)
     
  • FTSE 250

    19,879.84
    +69.18 (+0.35%)
     
  • AIM

    743.81
    +1.70 (+0.23%)
     
  • GBP/EUR

    1.1695
    +0.0026 (+0.23%)
     
  • GBP/USD

    1.2645
    +0.0007 (+0.06%)
     
  • Bitcoin GBP

    56,009.33
    +679.73 (+1.23%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • S&P 500

    5,254.78
    +6.29 (+0.12%)
     
  • DOW

    39,792.09
    +32.01 (+0.08%)
     
  • CRUDE OIL

    82.40
    +1.05 (+1.29%)
     
  • GOLD FUTURES

    2,227.70
    +15.00 (+0.68%)
     
  • NIKKEI 225

    40,168.07
    -594.66 (-1.46%)
     
  • HANG SENG

    16,541.42
    +148.58 (+0.91%)
     
  • DAX

    18,501.93
    +24.84 (+0.13%)
     
  • CAC 40

    8,223.23
    +18.42 (+0.22%)
     

Should You Be Tempted To Sell Informa plc (LON:INF) Because Of Its P/E Ratio?

This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to Informa plc's (LON:INF), to help you decide if the stock is worth further research. Informa has a price to earnings ratio of 25.68, based on the last twelve months. That means that at current prices, buyers pay £25.68 for every £1 in trailing yearly profits.

View our latest analysis for Informa

How Do I Calculate A Price To Earnings Ratio?

The formula for price to earnings is:

Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)

ADVERTISEMENT

Or for Informa:

P/E of 25.68 = £4.631 ÷ £0.180 (Based on the year to December 2019.)

(Note: the above calculation results may not be precise due to rounding.)

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. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.

How Does Informa's P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. The image below shows that Informa has a higher P/E than the average (18.4) P/E for companies in the media industry.

LSE:INF Price Estimation Relative to Market April 13th 2020
LSE:INF Price Estimation Relative to Market April 13th 2020

Its relatively high P/E ratio indicates that Informa shareholders think it will perform better than other companies in its industry classification. Clearly the market expects growth, but it isn't guaranteed. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

How Growth Rates Impact P/E Ratios

When earnings fall, the 'E' decreases, over time. That means unless the share price falls, the P/E will increase in a few years. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.

Informa's earnings per share fell by 8.7% in the last twelve months. And it has shrunk its earnings per share by 8.6% per year over the last three years. This growth rate might warrant a low P/E ratio. So we might expect a relatively low P/E.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

The 'Price' in P/E reflects the market capitalization of the company. 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.

Is Debt Impacting Informa's P/E?

Net debt is 40% of Informa's market cap. While that's enough to warrant consideration, it doesn't really concern us.

The Verdict On Informa's P/E Ratio

Informa's P/E is 25.7 which is above average (13.6) in its market. With some debt but no EPS growth last year, the market has high expectations of future profits.

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 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 Informa. 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.