Joint Stock Company “World Trade Center Moscow” (MISX:WTCM) trades with a trailing P/E of 49.7x, which is higher than the industry average of 9.5x. While WTCM might seem like a stock to avoid or sell if you own it, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. In this article, I will explain what the P/E ratio is as well as what you should look out for when using it. See our latest analysis for World Trade Center Moscow
Breaking down the P/E ratio
The P/E ratio is a popular ratio used in relative valuation since earnings power is a key driver of investment value. It compares a stock’s price per share to the stock’s earnings per share. A more intuitive way of understanding the P/E ratio is to think of it as how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for WTCM
Price-Earnings Ratio = Price per share ÷ Earnings per share
WTCM Price-Earnings Ratio = RUB7.85 ÷ RUB0.158 = 49.7x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to WTCM, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use. Since WTCM’s P/E of 49.7x is higher than its industry peers (9.5x), it means that investors are paying more than they should for each dollar of WTCM’s earnings. Therefore, according to this analysis, WTCM is an over-priced stock.
Assumptions to watch out for
However, before you rush out to sell your WTCM shares, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to WTCM. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared higher growth firms with WTCM, then its P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing WTCM to are fairly valued by the market. If this does not hold, there is a possibility that WTCM’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
Since you may have already conducted your due diligence on WTCM, the overvaluation of the stock may mean it is a good time to reduce your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I’ve outlined 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 WTCM’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 WTCM 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 WTCM’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.