Federal Hydro-Generating Company – RusHydro (MCX:HYDR) shares have continued recent momentum with a 31% gain in the last month alone. The full year gain of 35% is pretty reasonable, too.
All else being equal, a sharp share price increase should make a stock less attractive to potential investors. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. The implication here is that deep value investors might steer clear when expectations of a company are too high. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). A high P/E implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.
Does Federal Hydro-Generating Company – RusHydro Have A Relatively High Or Low P/E For Its Industry?
Federal Hydro-Generating Company – RusHydro’s P/E of 13.48 indicates some degree of optimism towards the stock. You can see in the image below that the average P/E (8.1) for companies in the electric utilities industry is lower than Federal Hydro-Generating Company – RusHydro’s P/E.
That means that the market expects Federal Hydro-Generating Company – RusHydro will outperform other companies in its industry. 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
If earnings fall then in the future the ‘E’ will be lower. That means unless the share price falls, the P/E will increase in a few years. 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 saw earnings per share decrease by 48% last year. And it has shrunk its earnings per share by 8.2% per year over the last five years. This growth rate might warrant a below average P/E ratio.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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.
How Does Federal Hydro-Generating Company – RusHydro’s Debt Impact Its P/E Ratio?
Federal Hydro-Generating Company – RusHydro has net debt equal to 44% of its market cap. You’d want to be aware of this fact, but it doesn’t bother us.
The Bottom Line On Federal Hydro-Generating Company – RusHydro’s P/E Ratio
Federal Hydro-Generating Company – RusHydro’s P/E is 13.5 which is above average (8.8) in its market. With modest debt but no EPS growth in the last year, it’s fair to say the P/E implies some optimism about future earnings, from the market. What is very clear is that the market has become more optimistic about Federal Hydro-Generating Company – RusHydro over the last month, with the P/E ratio rising from 10.3 back then to 13.5 today. For those who prefer to invest with the flow of momentum, that might mean it’s time to put the stock on a watchlist, or research it. But the contrarian may see it as a missed opportunity.
Investors have an opportunity when market expectations about a stock are wrong. People often underestimate remarkable growth — so investors can make money when fast growth is not fully appreciated. So this free report on the analyst consensus forecasts could help you make a master move on this stock.
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 firstname.lastname@example.org. 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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