A Sliding Share Price Has Us Looking At Sport Lisboa e Benfica - Futebol, SAD's (ELI:SLBEN) P/E Ratio

Simply Wall St

To the annoyance of some shareholders, Sport Lisboa e Benfica - Futebol SAD (ELI:SLBEN) shares are down a considerable 31% in the last month. The stock has been solid, longer term, gaining 10% in the last year.

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 ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.

See our latest analysis for Sport Lisboa e Benfica - Futebol SAD

How Does Sport Lisboa e Benfica - Futebol SAD's P/E Ratio Compare To Its Peers?

Sport Lisboa e Benfica - Futebol SAD's P/E of 2.26 indicates relatively low sentiment towards the stock. If you look at the image below, you can see Sport Lisboa e Benfica - Futebol SAD has a lower P/E than the average (30.0) in the entertainment industry classification.

ENXTLS:SLBEN Price Estimation Relative to Market April 10th 2020

Sport Lisboa e Benfica - Futebol SAD'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 Sport Lisboa e Benfica - Futebol SAD, it's quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the 'E' will be higher. That means unless the share price increases, the P/E will reduce in a few years. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

It's nice to see that Sport Lisboa e Benfica - Futebol SAD grew EPS by a stonking 43% in the last year. And it has bolstered its earnings per share by 16% per year over the last five years. With that performance, I would expect it to have an above average P/E ratio.

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

Don't forget that the P/E ratio considers market capitalization. So it won't reflect the advantage of cash, or disadvantage of debt. 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).

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.

Sport Lisboa e Benfica - Futebol SAD's Balance Sheet

Sport Lisboa e Benfica - Futebol SAD has net debt worth a very significant 197% of its market capitalization. If you want to compare its P/E ratio to other companies, you must keep in mind that these debt levels would usually warrant a relatively low P/E.

The Verdict On Sport Lisboa e Benfica - Futebol SAD's P/E Ratio

Sport Lisboa e Benfica - Futebol SAD trades on a P/E ratio of 2.3, which is below the PT market average of 9.7. The company has a meaningful amount of debt on the balance sheet, but that should not eclipse the solid earnings growth. The low P/E ratio suggests current market expectations are muted, implying these levels of growth will not continue. What can be absolutely certain is that the market has become more pessimistic about Sport Lisboa e Benfica - Futebol SAD over the last month, with the P/E ratio falling from 3.3 back then to 2.3 today. For those who prefer invest in growth, this stock apparently offers limited promise, but the deep value investors may find the pessimism around this stock enticing.

When the market is wrong about a stock, it gives savvy investors an opportunity. 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 could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.

But note: Sport Lisboa e Benfica - Futebol SAD 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).

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.