This article is written for those who want to get better at using price to earnings ratios (P/E ratios). To keep it practical, we'll show how Public Joint Stock Company "Ashinskiy metallurgical works"'s (MCX:AMEZ) P/E ratio could help you assess the value on offer. What is Ashinskiy metallurgical works's P/E ratio? Well, based on the last twelve months it is 1.31. That is equivalent to an earnings yield of about 76.6%.
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Ashinskiy metallurgical works:
P/E of 1.31 = RUB4.005 ÷ RUB3.068 (Based on the year to December 2019.)
(Note: the above calculation results may not be precise due to rounding.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each RUB1 of company earnings. 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 Ashinskiy metallurgical works's P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. We can see in the image below that the average P/E (6.7) for companies in the metals and mining industry is higher than Ashinskiy metallurgical works's P/E.
Its relatively low P/E ratio indicates that Ashinskiy metallurgical works shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Ashinskiy metallurgical works, it's quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. That means unless the share price falls, the P/E will increase in a few years. Then, a higher P/E might scare off shareholders, pushing the share price down.
Ashinskiy metallurgical works's earnings made like a rocket, taking off 163% last year. Unfortunately, earnings per share are down 7.5% a year, over 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. 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.
Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).
How Does Ashinskiy metallurgical works's Debt Impact Its P/E Ratio?
Ashinskiy metallurgical works's net debt is considerable, at 167% of its market cap. If you want to compare its P/E ratio to other companies, you must keep in mind that these debt levels would usually warrant a relatively low P/E.
The Verdict On Ashinskiy metallurgical works's P/E Ratio
Ashinskiy metallurgical works's P/E is 1.3 which is below average (7.7) in the RU market. The company has a meaningful amount of debt on the balance sheet, but that should not eclipse the solid earnings growth. If it continues to grow, then the current low P/E may prove to be unjustified.
When the market is wrong about a stock, it gives savvy investors an opportunity. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. We don't have analyst forecasts, but shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.
Of course you might be able to find a better stock than Ashinskiy metallurgical works. 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 firstname.lastname@example.org. 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.
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