The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll show how you can use Public Joint Stock Company Aeroflot – Russian Airlines’s (MCX:AFLT) P/E ratio to inform your assessment of the investment opportunity. Aeroflot – Russian Airlines has a price to earnings ratio of 6.89, based on the last twelve months. That means that at current prices, buyers pay RUB6.89 for every RUB1 in trailing yearly profits.
How Do You Calculate Aeroflot – Russian Airlines’s P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Aeroflot – Russian Airlines:
P/E of 6.89 = RUB94.05 ÷ RUB13.64 (Based on the trailing twelve months to June 2018.)
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. That isn’t necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the ‘E’ increases, over time. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. Then, a lower P/E should attract more buyers, pushing the share price up.
Aeroflot – Russian Airlines shrunk earnings per share by 63% over the last year. But over the longer term (5 years) earnings per share have increased by 37%.
How Does Aeroflot – Russian Airlines’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that Aeroflot – Russian Airlines has a lower P/E than the average (7.9) P/E for companies in the airlines industry.
Its relatively low P/E ratio indicates that Aeroflot – Russian Airlines shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Aeroflot – Russian Airlines, 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.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. That means it doesn’t take debt or cash into account. Theoretically, a business can improve its earnings (and produce a lower P/E in the future), by taking on debt (or spending its remaining cash).
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).
Is Debt Impacting Aeroflot – Russian Airlines’s P/E?
The extra options and safety that comes with Aeroflot – Russian Airlines’s RUруб1.6b net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.
The Bottom Line On Aeroflot – Russian Airlines’s P/E Ratio
Aeroflot – Russian Airlines trades on a P/E ratio of 6.9, which is fairly close to the RU market average of 6.6. While the lack of recent growth is probably muting optimism, the net cash position means it’s not surprising that expectations put the company roughly in line with the market average P/E.
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 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).
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.