Should You Be Tempted To Sell Lipetsk Power Sale Company Open Joint-Stock Company (MCX:LPSB) Because Of Its P/E Ratio?

This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll look at Lipetsk Power Sale Company Open Joint-Stock Company's (MCX:LPSB) P/E ratio and reflect on what it tells us about the company's share price. Lipetsk Power Sale Company has a price to earnings ratio of 20.70, based on the last twelve months. That means that at current prices, buyers pay RUB20.70 for every RUB1 in trailing yearly profits.

View our latest analysis for Lipetsk Power Sale Company

How Do You Calculate A P/E Ratio?

The formula for price to earnings is:

Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)

Or for Lipetsk Power Sale Company:

P/E of 20.70 = RUB6.75 ÷ RUB0.33 (Based on the year to June 2019.)

Is A High P/E Ratio Good?

The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price'.

How Does Lipetsk Power Sale Company's P/E Ratio Compare To Its Peers?

One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. You can see in the image below that the average P/E (7.6) for companies in the electric utilities industry is lower than Lipetsk Power Sale Company's P/E.

MISX:LPSB Price Estimation Relative to Market, January 29th 2020
MISX:LPSB Price Estimation Relative to Market, January 29th 2020

Lipetsk Power Sale Company's P/E tells us that market participants think the company will perform better than its industry peers, going forward. The market is optimistic about the future, but that doesn't guarantee future growth. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

How Growth Rates Impact P/E Ratios

Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. 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.

Lipetsk Power Sale Company saw earnings per share decrease by 54% last year. But over the longer term (3 years), earnings per share have increased by 12%. And it has shrunk its earnings per share by 2.8% per year over the last five years. This might lead to muted expectations.

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. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).

Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.

So What Does Lipetsk Power Sale Company's Balance Sheet Tell Us?

With net cash of ₽143m, Lipetsk Power Sale Company has a very strong balance sheet, which may be important for its business. Having said that, at 14% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.

The Bottom Line On Lipetsk Power Sale Company's P/E Ratio

Lipetsk Power Sale Company has a P/E of 20.7. That's higher than the average in its market, which is 8.9. The recent drop in earnings per share might keep value investors away, but the healthy balance sheet means the company retains potential for future growth. If fails to eventuate, the current high P/E could prove to be temporary, as the share price falls.

Investors have an opportunity when market expectations about a stock are wrong. 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. Although we don't have analyst forecasts you might want to assess this data-rich visualization of earnings, revenue and cash flow.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

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.

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. Thank you for reading.