Public Joint Stock Company “Cherkizovo Group” (MISX:GCHE) is currently trading at a trailing P/E of 8.3x, which is lower than the industry average of 18.5x. While GCHE might seem like an attractive stock to buy, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for. Check out our latest analysis for Cherkizovo Group
Demystifying the P/E ratio
P/E is often used for relative valuation since earnings power is a chief driver of investment value. By comparing a stock’s price per share to its earnings per share, we are able to see how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for GCHE
Price-Earnings Ratio = Price per share ÷ Earnings per share
GCHE Price-Earnings Ratio = RUB1125 ÷ RUB135.648 = 8.3x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to GCHE, such as company lifetime and products sold. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. At 8.3x, GCHE’s P/E is lower than its industry peers (18.5x). This implies that investors are undervaluing each dollar of GCHE’s earnings. As such, our analysis shows that GCHE represents an under-priced stock.
A few caveats
While our conclusion might prompt you to buy GCHE immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to GCHE. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you are comparing lower risk firms with GCHE, then its P/E would naturally be lower than its peers, as investors would value those with lower risk at a higher price. The second assumption that must hold true is that the stocks we are comparing GCHE to are fairly valued by the market. If this does not hold, there is a possibility that GCHE’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to add more of GCHE to your portfolio. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned above. Remember that basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PE ratio is very one-dimensional. If you have not done so already, I urge you to complete your research by taking a look at the following:
- Financial Health: Is GCHE’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
- Past Track Record: Has GCHE been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of GCHE’s historicals for more clarity.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see pass 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.