Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. To keep it practical, we'll show how Public Joint Stock Company Aeroflot - Russian Airlines's (MCX:AFLT) P/E ratio could help you assess the value on offer. Looking at earnings over the last twelve months, Aeroflot - Russian Airlines has a P/E ratio of 16.1. That is equivalent to an earnings yield of about 6.2%.
How Do I Calculate Aeroflot - Russian Airlines's Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Aeroflot - Russian Airlines:
P/E of 16.1 = RUB96.8 ÷ RUB6.01 (Based on the trailing twelve months to December 2018.)
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. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
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. Earnings growth means that in the future the 'E' will be higher. That means even if the current P/E is high, it will reduce over time if the share price stays flat. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
Aeroflot - Russian Airlines shrunk earnings per share by 72% over the last year. And over the longer term (5 years) earnings per share have decreased 4.6% annually. This growth rate might warrant a below average P/E ratio.
How Does Aeroflot - Russian Airlines's P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. You can see in the image below that the average P/E (8.2) for companies in the airlines industry is lower than Aeroflot - Russian Airlines's P/E.
Aeroflot - Russian Airlines's P/E tells us that market participants think the company will perform better than its industry peers, going forward. 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.
Remember: P/E Ratios Don't Consider The Balance Sheet
The 'Price' in P/E reflects the market capitalization of the company. So it won't reflect the advantage of cash, or disadvantage of debt. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.
Is Debt Impacting Aeroflot - Russian Airlines's P/E?
Aeroflot - Russian Airlines has net debt worth 65% of its market capitalization. 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 Aeroflot - Russian Airlines's P/E Ratio
Aeroflot - Russian Airlines trades on a P/E ratio of 16.1, which is above the RU market average of 7.4. With meaningful debt and a lack of recent earnings growth, the market has high expectations that the business will earn more in the future.
Investors have an opportunity when market expectations about a stock are wrong. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. 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.
You might be able to find a better buy than Aeroflot - Russian Airlines. 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).
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.
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. Thank you for reading.