Public Joint Stock Company Aeroflot – Russian Airlines (MISX:AFLT) is trading with a trailing P/E of 7.3x, which is lower than the industry average of 10.3x. While this makes AFLT appear like a great stock to buy, you might change your mind after I explain the assumptions behind the P/E ratio. Today, I will explain what the P/E ratio is as well as what you should look out for when using it. View our latest analysis for Aeroflot – Russian Airlines
Demystifying the P/E ratio
P/E is a popular ratio used for relative valuation. 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 AFLT
Price-Earnings Ratio = Price per share ÷ Earnings per share
AFLT Price-Earnings Ratio = RUB156.25 ÷ RUB21.338 = 7.3x
On its own, the P/E ratio doesn’t tell you much; however, it becomes extremely useful 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 AFLT, 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. AFLT’s P/E of 7.3x is lower than its industry peers (10.3x), which implies that each dollar of AFLT’s earnings is being undervalued by investors. Therefore, according to this analysis, AFLT is an under-priced stock.
Assumptions to be aware of
However, before you rush out to buy AFLT, it is important to note that this conclusion is based on two key assumptions. The first is that our “similar companies” are actually similar to AFLT, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with AFLT, then investors would naturally value it at a lower price since it is a riskier investment. The second assumption that must hold true is that the stocks we are comparing AFLT to are fairly valued by the market. If this is violated, AFLT’s P/E may be lower than its peers as they are actually overvalued by investors.
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.