Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. To keep it practical, we'll show how Public Joint-Stock Company Moscow United Electric Grid Company's (MCX:MSRS) P/E ratio could help you assess the value on offer. Based on the last twelve months, Moscow United Electric Grid's P/E ratio is 5.62. In other words, at today's prices, investors are paying RUB5.62 for every RUB1 in prior year profit.
How Do I Calculate Moscow United Electric Grid's Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Moscow United Electric Grid:
P/E of 5.62 = RUB1.02 ÷ RUB0.18 (Based on the year to June 2019.)
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 Does Moscow United Electric Grid's P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. We can see in the image below that the average P/E (6.2) for companies in the electric utilities industry is higher than Moscow United Electric Grid's P/E.
Its relatively low P/E ratio indicates that Moscow United Electric Grid shareholders think it will struggle to do as well as other companies in its industry classification. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the 'E' will be higher. That means unless the share price increases, the P/E will reduce in a few years. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
In the last year, Moscow United Electric Grid grew EPS like Taylor Swift grew her fan base back in 2010; the 220% gain was both fast and well deserved. Unfortunately, earnings per share are down 12% a year, over 5 years.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
Don't forget that the P/E ratio considers market capitalization. That means it doesn't take debt or cash into account. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on 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.
Is Debt Impacting Moscow United Electric Grid's P/E?
Moscow United Electric Grid has net debt worth a very significant 170% of its market capitalization. If you want to compare its P/E ratio to other companies, you must keep in mind that these debt levels would usually warrant a relatively low P/E.
The Verdict On Moscow United Electric Grid's P/E Ratio
Moscow United Electric Grid has a P/E of 5.6. That's below the average in the RU market, which is 7.4. The company has a meaningful amount of debt on the balance sheet, but that should not eclipse the solid earnings growth. The low P/E ratio suggests current market expectations are muted, implying these levels of growth will not continue.
Investors should be looking to buy stocks that the market is wrong about. 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 report on the analyst consensus forecasts could help you make a master move on this stock.
But note: Moscow United Electric Grid may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
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 email@example.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.