In This Article:
Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
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 Event Hospitality & Entertainment Limited's (ASX:EVT), to help you decide if the stock is worth further research. Event Hospitality & Entertainment has a price to earnings ratio of 16.59, based on the last twelve months. That is equivalent to an earnings yield of about 6.0%.
Check out our latest analysis for Event Hospitality & Entertainment
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Event Hospitality & Entertainment:
P/E of 16.59 = A$12.28 ÷ A$0.74 (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 A$1 of company earnings. 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
Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. That means unless the share price falls, the P/E will increase in a few years. Then, a higher P/E might scare off shareholders, pushing the share price down.
Event Hospitality & Entertainment increased earnings per share by 7.8% last year. And earnings per share have improved by 7.7% annually, over the last five years. But earnings per share are down 4.5% per year over the last three years.
How Does Event Hospitality & Entertainment's P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. We can see in the image below that the average P/E (23.6) for companies in the entertainment industry is higher than Event Hospitality & Entertainment's P/E.
Event Hospitality & Entertainment'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 Event Hospitality & Entertainment, 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
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. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.