In the telecommunications sector, the actual price-to-earnings (P/E) ratio for 2017 was 10.61, while the forward P/E for 2018 was 13.62.
The telecommunications sector includes everything from coaxial cables and cellphones to satellite equipment. This vast, globally linked industry provides users with the ability to instantaneously communicate with almost anyone, nearly anywhere in the world.
The industry has expanded and changed very quickly with rapid deregulation, increasing development worldwide, and innovative new technology, which continues to fuel exponential growth. Competition among a plethora of new companies and devices consistently makes a wider array of options available to consumers.
The Price-to-Earnings Ratio
The P/E ratio is a valuation metric used to compare the current price for a company’s stock to the amount it generates in earnings per share (EPS) of stock. It is calculated by dividing the current stock price by the EPS. EPS is generally derived from the company’s last four quarters, and this is referred to as the standard or trailing P/E ratio. The ratio can be adapted to use the estimated earnings a company anticipates generating in the next four quarters. This is known as the forward P/E ratio.
Typically, a high P/E ratio indicates investors expect high earnings growth in the company’s future, compared to those companies with low P/E ratios. It is typically more useful for investors and analysts to compare the P/E ratios to those of companies within the same industry. It is especially true that investors should compare like-to-like companies in the telecommunications industry because the sector is so vast and varied. Analysts and investors also compare the P/E ratios of a company against the company’s own historical ratios or to the average P/E of the overall stock market.
The P/E ratio is a metric well-suited to evaluating companies in the telecom sector because it essentially indicates the market's assessment of a company's growth potential, and the telecom sector is historically considered one of the higher-growth sectors.
(For related reading, see "The Industry Handbook: The Telecommunications Industry.")