The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). To keep it practical, we'll show how Public Joint Stock Company Gazprom's (MCX:GAZP) P/E ratio could help you assess the value on offer. Gazprom has a P/E ratio of 2.97, based on the last twelve months. That means that at current prices, buyers pay RUB2.97 for every RUB1 in trailing yearly profits.
How Do I Calculate Gazprom's Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Gazprom:
P/E of 2.97 = RUB223.10 ÷ RUB75.20 (Based on the trailing twelve months to June 2019.)
Is A High Price-to-Earnings 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.
How Does Gazprom's P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. If you look at the image below, you can see Gazprom has a lower P/E than the average (5.5) in the oil and gas industry classification.
Its relatively low P/E ratio indicates that Gazprom shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Gazprom, it's quite possible it could surprise on the upside. 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
Probably the most important factor in determining what P/E a company trades on is the earnings growth. Earnings growth means that in the future the 'E' will be higher. And in that case, the P/E ratio itself will drop rather quickly. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Gazprom's earnings made like a rocket, taking off 72% last year. Even better, EPS is up 34% per year over three years. So you might say it really deserves to have an above-average P/E ratio.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
Don't forget that the P/E ratio considers market capitalization. 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).
How Does Gazprom's Debt Impact Its P/E Ratio?
Net debt is 41% of Gazprom's market cap. You'd want to be aware of this fact, but it doesn't bother us.
The Bottom Line On Gazprom's P/E Ratio
Gazprom trades on a P/E ratio of 3.0, which is below the RU market average of 6.9. The EPS growth last year was strong, and debt levels are quite reasonable. The low P/E ratio suggests current market expectations are muted, implying these levels of growth will not continue.
Investors have an opportunity when market expectations about a stock are wrong. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine. So this free report on the analyst consensus forecasts could help you make a master move on this stock.
You might be able to find a better buy than Gazprom. 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 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. Thank you for reading.