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Is Interregional Distribution Grid Company of Center and Volga Region, Public Joint Stock Company's (MCX:MRKP) P/E Ratio Really That Good?

Simply Wall St

Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll show how you can use Interregional Distribution Grid Company of Center and Volga Region, Public Joint Stock Company's (MCX:MRKP) P/E ratio to inform your assessment of the investment opportunity. Interregional Distribution Grid Company of Center and Volga Region has a price to earnings ratio of 3.70, based on the last twelve months. That means that at current prices, buyers pay RUB3.70 for every RUB1 in trailing yearly profits.

Check out our latest analysis for Interregional Distribution Grid Company of Center and Volga Region

How Do You Calculate Interregional Distribution Grid Company of Center and Volga Region's P/E Ratio?

The formula for price to earnings is:

Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)

Or for Interregional Distribution Grid Company of Center and Volga Region:

P/E of 3.70 = RUB0.23 ÷ RUB0.06 (Based on the year to September 2019.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that buyers have to pay a higher price for each RUB1 the company has earned over the last year. 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 Does Interregional Distribution Grid Company of Center and Volga Region'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 Center and Volga Region has a lower P/E than the average (7.5) in the electric utilities industry classification.

MISX:MRKP Price Estimation Relative to Market, January 26th 2020

Interregional Distribution Grid Company of Center and Volga Region's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Many investors like to buy stocks when the market is pessimistic about their prospects. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the 'E' will be higher. That means unless the share price increases, the P/E will reduce in a few years. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Interregional Distribution Grid Company of Center and Volga Region saw earnings per share decrease by 48% last year. But EPS is up 25% over the last 3 years.

Remember: P/E Ratios Don't Consider The Balance Sheet

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. So it won't reflect the advantage of cash, or disadvantage of debt. In theory, a company can lower its future P/E ratio by using cash or debt to invest in 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).

So What Does Interregional Distribution Grid Company of Center and Volga Region's Balance Sheet Tell Us?

Net debt totals 89% of Interregional Distribution Grid Company of Center and Volga Region's market cap. This is enough debt that you'd have to make some adjustments before using the P/E ratio to compare it to a company with net cash.

The Verdict On Interregional Distribution Grid Company of Center and Volga Region's P/E Ratio

Interregional Distribution Grid Company of Center and Volga Region trades on a P/E ratio of 3.7, which is below the RU market average of 8.8. Given meaningful debt, and a lack of recent growth, the market looks to be extrapolating this recent performance; reflecting low expectations for the future.

Investors should be looking to buy stocks that the market is wrong about. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

But note: Interregional Distribution Grid Company of Center and Volga Region may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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.