Unfortunately for some shareholders, the Nordic Entertainment Group (STO:NENT B) share price has dived 44% in the last thirty days. The bad news is that the recent drop obliterated the last year's worth of gains; the stock is flat over twelve months.
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.
Check out our latest analysis for Nordic Entertainment Group
Does Nordic Entertainment Group Have A Relatively High Or Low P/E For Its Industry?
Nordic Entertainment Group's P/E of 21.35 indicates some degree of optimism towards the stock. You can see in the image below that the average P/E (14.4) for companies in the media industry is lower than Nordic Entertainment Group's P/E.
That means that the market expects Nordic Entertainment Group will outperform other companies in its industry. 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
Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
Nordic Entertainment Group's earnings per share fell by 54% in the last twelve months. And over the longer term (5 years) earnings per share have decreased 8.9% annually. This might lead to muted expectations.
Remember: P/E Ratios Don't Consider The Balance Sheet
The 'Price' in P/E reflects the market capitalization of the company. That means it doesn't take debt or cash into account. 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).
While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.
So What Does Nordic Entertainment Group's Balance Sheet Tell Us?
Nordic Entertainment Group's net debt equates to 28% of its market capitalization. You'd want to be aware of this fact, but it doesn't bother us.
The Bottom Line On Nordic Entertainment Group's P/E Ratio
Nordic Entertainment Group has a P/E of 21.3. That's higher than the average in its market, which is 13.4. With some debt but no EPS growth last year, the market has high expectations of future profits. Given Nordic Entertainment Group's P/E ratio has declined from 37.9 to 21.3 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.
Investors should be looking to buy stocks that the market is wrong about. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine. 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 Nordic Entertainment Group. 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.
2020-03-20 07:51:00Z
https://finance.yahoo.com/news/does-nordic-entertainment-groups-sto-075146807.html
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