Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll apply a basic P/E ratio analysis to Public Joint-Stock Company Interregional Distribution Grid Company of Volga's (MCX:MRKV), to help you decide if the stock is worth further research. Interregional Distribution Grid Company of Volga has a price to earnings ratio of 4.37, based on the last twelve months. In other words, at today's prices, investors are paying RUB4.37 for every RUB1 in prior year profit.
How Do I Calculate Interregional Distribution Grid Company of Volga'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 Volga:
P/E of 4.37 = RUB0.09 ÷ RUB0.02 (Based on the year to September 2019.)
Is A High Price-to-Earnings Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price'.
How Does Interregional Distribution Grid Company of Volga's P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. If you look at the image below, you can see Interregional Distribution Grid Company of Volga has a lower P/E than the average (7.9) in the electric utilities industry classification.
Its relatively low P/E ratio indicates that Interregional Distribution Grid Company of Volga shareholders think it will struggle to do as well as other companies in its industry classification. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. 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.
Interregional Distribution Grid Company of Volga's earnings per share fell by 45% in the last twelve months. But EPS is up 4.8% over the last 3 years.
Remember: P/E Ratios Don't Consider The Balance Sheet
Don't forget that the P/E ratio considers market capitalization. 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).
While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.
So What Does Interregional Distribution Grid Company of Volga's Balance Sheet Tell Us?
Interregional Distribution Grid Company of Volga has net debt worth 12% of its market capitalization. That's enough debt to impact the P/E ratio a little; so keep it in mind if you're comparing it to companies without debt.
The Bottom Line On Interregional Distribution Grid Company of Volga's P/E Ratio
Interregional Distribution Grid Company of Volga trades on a P/E ratio of 4.4, which is below the RU market average of 8.7. With only modest debt, it's likely the lack of EPS growth at least partially explains the pessimism implied by the P/E ratio.
When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.
Of course you might be able to find a better stock than Interregional Distribution Grid Company of Volga. So you may wish to see this free collection of other companies that have grown earnings strongly.
If you spot an error that warrants correction, please contact the editor at email@example.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.