Why Public Joint-stock Company "TNS energo Voronezh"'s (MCX:VRSB) High P/E Ratio Isn't Necessarily A Bad Thing
This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to Public Joint-stock Company "TNS energo Voronezh"'s (MCX:VRSB), to help you decide if the stock is worth further research. Looking at earnings over the last twelve months, TNS energo Voronezh has a P/E ratio of 26.39. In other words, at today's prices, investors are paying RUB26.39 for every RUB1 in prior year profit.
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View our latest analysis for TNS energo Voronezh
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for TNS energo Voronezh:
P/E of 26.39 = RUB38.6 ÷ RUB1.46 (Based on the trailing twelve months to December 2018.)
Is A High P/E Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each RUB1 the company has earned over the last year. That isn't a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business's prospects, relative to stocks with a lower P/E.
How Growth Rates Impact P/E Ratios
Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. That means even if the current P/E is low, it will increase over time if the share price stays flat. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
TNS energo Voronezh saw earnings per share improve by -5.1% last year. And its annual EPS growth rate over 5 years is 9.1%. Unfortunately, earnings per share are down 4.8% a year, over 3 years.
How Does TNS energo Voronezh's P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. As you can see below, TNS energo Voronezh has a much higher P/E than the average company (6.9) in the electric utilities industry.
That means that the market expects TNS energo Voronezh will outperform other companies in its industry. Clearly the market expects growth, but it isn't guaranteed. So further research is always essential. I often monitor director buying and selling.
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.
TNS energo Voronezh's Balance Sheet
TNS energo Voronezh's net debt is 21% of its market cap. It would probably deserve a higher P/E ratio if it was net cash, since it would have more options for growth.
The Bottom Line On TNS energo Voronezh's P/E Ratio
TNS energo Voronezh's P/E is 26.4 which is way above average (6.9) in the RU market. With modest debt relative to its size, and modest earnings growth, the market is likely expecting sustained long-term growth, if not a near-term improvement.
Investors should be looking to buy stocks that the market is wrong about. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. We don't have analyst forecasts, but shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.
Of course you might be able to find a better stock than TNS energo Voronezh. So you may wish to see this free collection of other companies that have grown earnings strongly.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Thank you for reading.
