Average Price-to-Earnings Ratio in the Telecommunications Sector

The Communications Systems (JCS) price-to-earnings (PE) as of May 2021 was zero, according to Macrotrends. However, in September 2020 it was 25.53. The price-to-earnings (P/E) ratio is calculated by taking the latest closing price and dividing it by the most recent earnings per share (EPS) number. The P/E ratio assesses whether a stock is over or undervalued and is the most widely used valuation measure.

Understanding the Telecommunications Sector

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 undergone rapid deregulation, increasing development worldwide, and innovative new technology advances, which continue to fuel exponential growth. The 5G network rollout is one example. Competition among new companies and devices consistently makes a wider array of options available to consumers.

The Price-to-Earnings (P/E) 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. The P/E ratio is the most commonly used ratio to determine if a stock is cheap or expensive relative to its earnings.

It is calculated by dividing the current stock price by the EPS.

The formula for the P/E ratio is P/E = Stock Price / Earnings Per Share.

If earnings per share (EPS) is lower than zero, then that causes the stock to have a negative P/E ratio. 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. The forward ratio for the communications services sector was 21.1 as of May 2021, according to Yardeni Research.

What Does a High or Low P/E Ratio Indicate?

Typically, a high or low 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.

Special Considerations

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 a high-growth sector.