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Here's How P/E Ratios Can Help Us Understand Leone Film Group S.p.A. (BIT:LFG)

Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. To keep it practical, we'll show how Leone Film Group S.p.A.'s (BIT:LFG) P/E ratio could help you assess the value on offer. Looking at earnings over the last twelve months, Leone Film Group has a P/E ratio of 6.37. That is equivalent to an earnings yield of about 15.7%.

See our latest analysis for Leone Film Group

How Do You Calculate A P/E Ratio?

The formula for price to earnings is:

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

Or for Leone Film Group:

P/E of 6.37 = €2.700 ÷ €0.424 (Based on the year to December 2019.)

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

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. 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.

Does Leone Film Group Have A Relatively High Or Low P/E For Its Industry?

We can get an indication of market expectations by looking at the P/E ratio. We can see in the image below that the average P/E (7.0) for companies in the entertainment industry is higher than Leone Film Group's P/E.

BIT:LFG Price Estimation Relative to Market May 27th 2020
BIT:LFG Price Estimation Relative to Market May 27th 2020

Leone Film Group'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 Leone Film Group, 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.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. When earnings grow, the 'E' increases, over time. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

Most would be impressed by Leone Film Group earnings growth of 13% in the last year. And its annual EPS growth rate over 5 years is 18%. With that performance, you might expect an above average P/E ratio.

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. 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.

Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).

Leone Film Group's Balance Sheet

Leone Film Group has net debt worth a very significant 139% of its market capitalization. This level of debt justifies a relatively low P/E, so remain cognizant of the debt, if you're comparing it to other stocks.

The Verdict On Leone Film Group's P/E Ratio

Leone Film Group trades on a P/E ratio of 6.4, which is below the IT market average of 15.4. While the EPS growth last year was strong, the significant debt levels reduce the number of options available to management. If it continues to grow, then the current low P/E may prove to be unjustified.

Investors have an opportunity when market expectations about a stock are wrong. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. Although we don't have analyst forecasts you might want to assess this data-rich visualization of earnings, revenue and cash flow.

But note: Leone Film Group may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

Love or hate this article? Concerned about the content? Get in touch with us directly. Alternatively, email 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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.