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Does Interregional Distribution Grid Company of Urals, Joint Stock Company's (MCX:MRKU) P/E Ratio Signal A Buying Opportunity?

Simply Wall St

Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll show how you can use Interregional Distribution Grid Company of Urals, Joint Stock Company's (MCX:MRKU) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Interregional Distribution Grid Company of Urals's P/E ratio is 6.98. That means that at current prices, buyers pay RUB6.98 for every RUB1 in trailing yearly profits.

View our latest analysis for Interregional Distribution Grid Company of Urals

How Do I Calculate Interregional Distribution Grid Company of Urals's Price To Earnings Ratio?

The formula for P/E is:

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

Or for Interregional Distribution Grid Company of Urals:

P/E of 6.98 = RUB0.17 ÷ RUB0.02 (Based on the trailing twelve months to September 2019.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that buyers have to pay a higher price for each RUB1 the company has earned over the last year. That isn't a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business's prospects, relative to stocks with a lower P/E.

How Does Interregional Distribution Grid Company of Urals's P/E Ratio Compare To Its Peers?

We can get an indication of market expectations by looking at the P/E ratio. You can see in the image below that the average P/E (7.0) for companies in the electric utilities industry is roughly the same as Interregional Distribution Grid Company of Urals's P/E.

MISX:MRKU Price Estimation Relative to Market, December 4th 2019

Its P/E ratio suggests that Interregional Distribution Grid Company of Urals shareholders think that in the future it will perform about the same as other companies in its industry classification. So if Interregional Distribution Grid Company of Urals actually outperforms its peers going forward, that should be a positive for the share price. Checking factors such as director buying and selling. could help you form your own view on if that will happen.

How Growth Rates Impact P/E Ratios

Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

In the last year, Interregional Distribution Grid Company of Urals grew EPS like Taylor Swift grew her fan base back in 2010; the 73% gain was both fast and well deserved. The sweetener is that the annual five year growth rate of 125% is also impressive. With that kind of growth rate we would generally expect a high P/E ratio.

Remember: P/E Ratios Don't Consider The Balance Sheet

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. Thus, the metric does not reflect cash or debt held by the company. 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.

How Does Interregional Distribution Grid Company of Urals's Debt Impact Its P/E Ratio?

Net debt totals 100% of Interregional Distribution Grid Company of Urals's market cap. If you want to compare its P/E ratio to other companies, you should absolutely keep in mind it has significant borrowings.

The Verdict On Interregional Distribution Grid Company of Urals's P/E Ratio

Interregional Distribution Grid Company of Urals's P/E is 7.0 which is about average (7.4) in the RU market. The significant levels of debt do detract somewhat from the strong earnings growth. The P/E suggests the market isn't confident that growth will be sustained, though.

Investors have an opportunity when market expectations about a stock are wrong. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.

But note: Interregional Distribution Grid Company of Urals 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.