This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll look at Public Joint-Stock Company Federal Hydro-Generating Company – RusHydro’s (MCX:HYDR) P/E ratio and reflect on what it tells us about the company’s share price. Looking at earnings over the last twelve months, Federal Hydro-Generating Company – RusHydro has a P/E ratio of 10.99. In other words, at today’s prices, investors are paying RUB10.99 for every RUB1 in prior year profit.
How Do You Calculate Federal Hydro-Generating Company – RusHydro’s P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Federal Hydro-Generating Company – RusHydro:
P/E of 10.99 = RUB0.56 ÷ RUB0.05 (Based on the trailing twelve months to September 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. 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 Federal Hydro-Generating Company – RusHydro’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. The image below shows that Federal Hydro-Generating Company – RusHydro has a higher P/E than the average (7.4) P/E for companies in the electric utilities industry.
Federal Hydro-Generating Company – RusHydro’s P/E tells us that market participants think the company will perform better than its industry peers, going forward. Clearly the market expects growth, but it isn’t guaranteed. 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
Companies that shrink earnings per share quickly will rapidly decrease the ‘E’ in the equation. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. A higher P/E should indicate the stock is expensive relative to others — and that may encourage shareholders to sell.
Federal Hydro-Generating Company – RusHydro’s earnings per share fell by 48% in the last twelve months. And EPS is down 8.2% a year, over the last 5 years. This growth rate might warrant a below average P/E ratio.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don’t forget that the P/E ratio considers market capitalization. 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.
While growth expenditure doesn’t always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.
Federal Hydro-Generating Company – RusHydro’s Balance Sheet
Federal Hydro-Generating Company – RusHydro has net debt worth 54% of its market capitalization. This is enough debt that you’d have to make some adjustments before using the P/E ratio to compare it to a company with net cash.
The Bottom Line On Federal Hydro-Generating Company – RusHydro’s P/E Ratio
Federal Hydro-Generating Company – RusHydro’s P/E is 11.0 which is above average (7.8) in its market. With significant debt and no EPS growth last year, shareholders are betting on an improvement in earnings from the company.
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. So this free report on the analyst consensus forecasts could help you make a master move on this stock.
You might be able to find a better buy than Federal Hydro-Generating Company – RusHydro. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
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.
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