Here's How P/E Ratios Can Help Us Understand Modern Times Group Mtg AB (STO:MTG B)

Simply Wall St

Wed, Jun 12, 2019, 4:12 AM

The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll show how you can use Modern Times Group Mtg AB's (STO:MTG B) P/E ratio to inform your assessment of the investment opportunity. Modern Times Group Mtg has a price to earnings ratio of 7.55, based on the last twelve months. That is equivalent to an earnings yield of about 13%.

Check out our latest analysis for Modern Times Group Mtg

How Do I Calculate A Price To Earnings Ratio?

The formula for P/E is:

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

Or for Modern Times Group Mtg:

P/E of 7.55 = SEK111.4 ÷ SEK14.76 (Based on the trailing twelve months to March 2019.)

Is A High P/E Ratio Good?

The higher the P/E ratio, the higher the price tag of a business, relative to its trailing 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

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. That means even if the current P/E is high, it will reduce over time if the share price stays flat. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

Modern Times Group Mtg's earnings made like a rocket, taking off 214% last year. And earnings per share have improved by 32% annually, over the last three years. So we'd absolutely expect it to have a relatively high P/E ratio.

How Does Modern Times Group Mtg'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 Modern Times Group Mtg has a lower P/E than the average (34.6) in the entertainment industry classification.

OM:MTG B Price Estimation Relative to Market, June 12th 2019

Its relatively low P/E ratio indicates that Modern Times Group Mtg shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Modern Times Group Mtg, it's quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or selling.

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. So it won't reflect the advantage of cash, or disadvantage of debt. 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.