Advertisement
Australia markets closed
  • ALL ORDS

    8,153.70
    +80.10 (+0.99%)
     
  • ASX 200

    7,896.90
    +77.30 (+0.99%)
     
  • AUD/USD

    0.6515
    -0.0021 (-0.32%)
     
  • OIL

    82.99
    +1.64 (+2.02%)
     
  • GOLD

    2,241.00
    +28.30 (+1.28%)
     
  • Bitcoin AUD

    108,509.50
    +2,465.91 (+2.33%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • AUD/EUR

    0.6038
    +0.0008 (+0.13%)
     
  • AUD/NZD

    1.0908
    +0.0028 (+0.26%)
     
  • NZX 50

    12,105.29
    +94.63 (+0.79%)
     
  • NASDAQ

    18,254.69
    -26.15 (-0.14%)
     
  • FTSE

    7,952.62
    +20.64 (+0.26%)
     
  • Dow Jones

    39,807.37
    +47.29 (+0.12%)
     
  • DAX

    18,492.49
    +15.40 (+0.08%)
     
  • Hang Seng

    16,541.42
    +148.58 (+0.91%)
     
  • NIKKEI 225

    40,168.07
    -594.66 (-1.46%)
     

Is MNF Group Limited's (ASX:MNF) High P/E Ratio A Problem For Investors?

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 MNF Group Limited's (ASX:MNF), to help you decide if the stock is worth further research. MNF Group has a price to earnings ratio of 33.24, based on the last twelve months. That is equivalent to an earnings yield of about 3.0%.

Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!

See our latest analysis for MNF Group

How Do You Calculate A P/E Ratio?

The formula for P/E is:

ADVERTISEMENT

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

Or for MNF Group:

P/E of 33.24 = A$4.03 ÷ A$0.12 (Based on the trailing twelve months to December 2018.)

Is A High Price-to-Earnings Ratio Good?

The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.

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. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.

MNF Group's earnings per share fell by 34% in the last twelve months. But EPS is up 8.5% over the last 5 years. And over the longer term (3 years) earnings per share have decreased 1.0% annually. This could justify a low P/E.

How Does MNF Group's P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that MNF Group has a P/E ratio that is roughly in line with the telecom industry average (33.2).

ASX:MNF Price Estimation Relative to Market, May 27th 2019
ASX:MNF Price Estimation Relative to Market, May 27th 2019

Its P/E ratio suggests that MNF Group shareholders think that in the future it will perform about the same as other companies in its industry classification. The company could surprise by performing better than average, in the future. I inform my view byby checking management tenure and remuneration, among other things.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

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.

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.

MNF Group's Balance Sheet

MNF Group has net debt worth 15% of its market capitalization. That's enough debt to impact the P/E ratio a little; so keep it in mind if you're comparing it to companies without debt.

The Bottom Line On MNF Group's P/E Ratio

MNF Group has a P/E of 33.2. That's higher than the average in the AU market, which is 16.2. With some debt but no EPS growth last year, the market has high expectations of future profits.

Investors have an opportunity when market expectations about a stock are wrong. 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 visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.

You might be able to find a better buy than MNF 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).

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.

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. Thank you for reading.