Qiwi plc (NASDAQ:QIWI) trades with a trailing P/E of 21.4x, which is lower than the industry average of 26.5x. While this makes QIWI appear like a great stock to buy, you might change your mind after I explain the assumptions behind the P/E ratio. Today, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. See our latest analysis for QIWI
Breaking down the Price-Earnings ratio
P/E is often used for relative valuation since earnings power is a chief driver of investment value. By comparing a stock’s price per share to its earnings per share, we are able to see how much investors are paying for each dollar of the company’s earnings.
Price-Earnings Ratio = Price per share ÷ Earnings per share
P/E Calculation for QIWI
Price per share = 16.61
Earnings per share = 44.883
∴ Price-Earnings Ratio = 16.61 ÷ 44.883 = 21.4x
On its own, the P/E ratio doesn’t tell you much; however, it becomes extremely useful when you compare it with other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to QIWI, such as capital structure and profitability. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. Since it is expected that similar companies have similar P/E ratios, we can come to some conclusions about the stock if the ratios are different.
QIWI’s P/E of 21.4x is lower than its industry peers (26.5x), which implies that each dollar of QIWI’s earnings is being undervalued by investors. Therefore, according to this analysis, QIWI is an under-priced stock.
Assumptions to be aware of
However, before you rush out to buy QIWI, it is important to note that this conclusion is based on two key assumptions. The first is that our “similar companies” are actually similar to QIWI. If the companies aren’t similar, the difference in P/E might be a result of other factors. For example, if you inadvertently compared lower risk firms with QIWI, then investors would naturally value QIWI at a lower price since it is a riskier investment. Similarly, if you accidentally compared higher growth firms with QIWI, investors would also value QIWI at a lower price since it is a lower growth investment. Both scenarios would explain why QIWI has a lower P/E ratio than its peers. The second assumption that must hold true is that the stocks we are comparing QIWI to are fairly valued by the market. If this assumption does not hold true, QIWI’s lower P/E ratio may be because firms in our peer group are being overvalued by the market.
What this means for you:
Are you a shareholder? Since you may have already conducted your due diligence on QIWI, the undervaluation of the stock may mean it is a good time to top up on your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I've outlined above.
Are you a potential investor? If QIWI has been on your watch list for a while, it is best you also consider its intrinsic valuation. Looking at PE on its own will not give you the full picture of the stock as an investment, so I suggest you should also look at other relative valuation metrics like EV/EBITDA or PEG.
PE is one aspect of your portfolio construction to consider when holding or entering into a stock. But it is certainly not the only factor. Take a look at our most recent infographic report on Qiwi for a more in-depth analysis of the stock to help you make a well-informed investment decision. Since we know a limitation of PE is it doesn't properly account for growth, you can use our free platform to see my list of stocks with a high growth potential and see if their PE is still reasonable.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.