To the annoyance of some shareholders, PJSC LUKOIL (MCX:LKOH) shares are down a considerable 32% in the last month. Even longer term holders have taken a real hit with the stock declining 22% in the last year.
All else being equal, a share price drop should make a stock more attractive to potential investors. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. So, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. Perhaps the simplest way to get a read on investors' expectations of a business is to look at its Price to Earnings Ratio (PE Ratio). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.
Does PJSC LUKOIL Have A Relatively High Or Low P/E For Its Industry?
PJSC LUKOIL's P/E is 4.58. As you can see below PJSC LUKOIL has a P/E ratio that is fairly close for the average for the oil and gas industry, which is 4.5.
Its P/E ratio suggests that PJSC LUKOIL shareholders think that in the future it will perform about the same as other companies in its industry classification. The company could surprise by performing better than average, in the future. Checking factors such as director buying and selling. could help you form your own view on if that will happen.
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. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means unless the share price increases, the P/E will reduce in a few years. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
PJSC LUKOIL increased earnings per share by an impressive 10% over the last twelve months. And its annual EPS growth rate over 5 years is 12%. So one might expect an above 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. 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.
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 PJSC LUKOIL's Debt Impact Its P/E Ratio?
PJSC LUKOIL has net cash of ₽178b. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.
The Verdict On PJSC LUKOIL's P/E Ratio
PJSC LUKOIL has a P/E of 4.6. That's below the average in the RU market, which is 7.3. Not only should the net cash position reduce risk, but the recent growth has been impressive. The below average P/E ratio suggests that market participants don't believe the strong growth will continue. Given PJSC LUKOIL's P/E ratio has declined from 6.7 to 4.6 in the last month, we know for sure that the market is more worried about the business today, than it was back then. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for deep value investors this stock might justify some research.
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.
But note: PJSC LUKOIL 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 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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