Qiwi plc (NASDAQ:QIWI) trades with a trailing P/E of 24.9x, which is lower than the industry average of 25.6x. Although some investors may jump to the conclusion that this is a great buying opportunity, understanding the assumptions behind the P/E ratio might change your mind. Today, I will explain what the P/E ratio is as well as what you should look out for when using it. See our latest analysis for Qiwi
Breaking down the P/E ratio
The P/E ratio is one of many ratios used in relative valuation. It compares a stock’s price per share to the stock’s earnings per share. A more intuitive way of understanding the P/E ratio is to think of it as how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for QIWI
Price-Earnings Ratio = Price per share ÷ Earnings per share
QIWI Price-Earnings Ratio = RUB1037.14 ÷ RUB41.662 = 24.9x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful 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. QIWI’s P/E of 24.9x is lower than its industry peers (25.6x), 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, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with QIWI, then its P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing QIWI to are fairly valued by the market. If this does not hold true, QIWI’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
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.