This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll show how you can use Public Joint Stock Oil Company Bashneft’s (MCX:BANE) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Oil Company Bashneft’s P/E ratio is 3.35. That corresponds to an earnings yield of approximately 30%.
How Do You Calculate Oil Company Bashneft’s P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Oil Company Bashneft:
P/E of 3.35 = RUB1943 ÷ RUB579.28 (Based on the year to December 2018.)
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 Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. When earnings grow, the ‘E’ increases, over time. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Oil Company Bashneft’s earnings per share fell by 31% in the last twelve months. But over the longer term (5 years) earnings per share have increased by 29%.
How Does Oil Company Bashneft’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. If you look at the image below, you can see Oil Company Bashneft has a lower P/E than the average (3.6) in the oil and gas industry classification.
This suggests that market participants think Oil Company Bashneft will underperform other companies in its industry. Since the market seems unimpressed with Oil Company Bashneft, it’s quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
Remember: P/E Ratios Don’t Consider The Balance Sheet
Don’t forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. 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.
Is Debt Impacting Oil Company Bashneft’s P/E?
Oil Company Bashneft’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 Oil Company Bashneft’s P/E Ratio
Oil Company Bashneft trades on a P/E ratio of 3.4, which is below the RU market average of 7.2. The debt levels are not a major concern, but the lack of EPS growth is likely weighing on sentiment.
When the market is wrong about a stock, it gives savvy investors an opportunity. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. 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 Oil Company Bashneft. 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).
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.