The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to Public Joint-Stock Company Federal Hydro-Generating Company - RusHydro's (MCX:HYDR), to help you decide if the stock is worth further research. What is Federal Hydro-Generating Company - RusHydro's P/E ratio? Well, based on the last twelve months it is 11.54. That means that at current prices, buyers pay RUB11.54 for every RUB1 in trailing yearly profits.
How Do I Calculate Federal Hydro-Generating Company - RusHydro's Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Federal Hydro-Generating Company - RusHydro:
P/E of 11.54 = RUB0.59 ÷ RUB0.05 (Based on the trailing twelve months to September 2019.)
Is A High P/E Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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'.
Does Federal Hydro-Generating Company - RusHydro Have A Relatively High Or Low P/E For Its Industry?
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 (7.8) for companies in the electric utilities industry is lower than Federal Hydro-Generating Company - RusHydro's P/E.
Its relatively high P/E ratio indicates that Federal Hydro-Generating Company - RusHydro shareholders think it will perform better than other companies in its industry classification. The market is optimistic about the future, but that doesn't guarantee future growth. So further research is always essential. I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the 'E' will be lower. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.
Federal Hydro-Generating Company - RusHydro shrunk earnings per share by 48% over the last year. And EPS is down 8.2% a year, over the last 5 years. This growth rate might warrant a below average P/E ratio.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. That means it doesn't take debt or cash into account. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.
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 Federal Hydro-Generating Company - RusHydro's Debt Impact Its P/E Ratio?
Federal Hydro-Generating Company - RusHydro's net debt is 52% of its 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 Bottom Line On Federal Hydro-Generating Company - RusHydro's P/E Ratio
Federal Hydro-Generating Company - RusHydro trades on a P/E ratio of 11.5, which is above its market average of 8.6. With relatively high debt, and no earnings per share growth over twelve months, it's safe to say the market believes the company will improve its earnings growth in the future.
Investors should be looking to buy stocks that the market is wrong about. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
You might be able to find a better buy than Federal Hydro-Generating Company - RusHydro. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
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.