In This Article:
To the annoyance of some shareholders, Nine Entertainment Holdings (ASX:NEC) shares are down a considerable 35% in the last month. The recent drop has obliterated the annual return, with the share price now down 27% over that longer period.
All else being equal, a share price drop should make a stock more attractive to potential investors. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. So, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. 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). A high P/E implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.
View our latest analysis for Nine Entertainment Holdings
Does Nine Entertainment Holdings Have A Relatively High Or Low P/E For Its Industry?
We can tell from its P/E ratio of 14.10 that sentiment around Nine Entertainment Holdings isn't particularly high. The image below shows that Nine Entertainment Holdings has a lower P/E than the average (23.5) P/E for companies in the media industry.
This suggests that market participants think Nine Entertainment Holdings will underperform other companies in its industry. Many investors like to buy stocks when the market is pessimistic about their prospects. You should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. 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. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Nine Entertainment Holdings's earnings per share fell by 61% in the last twelve months. But EPS is up 2.6% over the last 5 years.
Remember: P/E Ratios Don't Consider The Balance Sheet
Don't forget that the P/E ratio considers market capitalization. That means it doesn't take debt or cash into account. 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.