The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll look at Public Joint Stock Company Gazprom’s (MCX:GAZP) P/E ratio and reflect on what it tells us about the company’s share price. Gazprom has a P/E ratio of 3.13, based on the last twelve months. That is equivalent to an earnings yield of about 32.0%.
How Do I Calculate Gazprom’s Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Gazprom:
P/E of 3.13 = RUB235.36 ÷ RUB75.20 (Based on the trailing twelve months to June 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each RUB1 of company 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.
Does Gazprom Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company. If you look at the image below, you can see Gazprom has a lower P/E than the average (6.0) in the oil and gas industry classification.
This suggests that market participants think Gazprom will underperform other companies in its industry.
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. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. That means even if the current P/E is high, it will reduce over time if the share price stays flat. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.
In the last year, Gazprom grew EPS like Taylor Swift grew her fan base back in 2010; the 72% gain was both fast and well deserved. And earnings per share have improved by 34% annually, over the last three years. So we’d absolutely expect it to have a relatively high P/E ratio. Shareholders have some reason to be optimistic, but the future is always uncertain. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).
Is Debt Impacting Gazprom’s P/E?
Net debt is 39% of Gazprom’s market cap. While that’s enough to warrant consideration, it doesn’t really concern us.
The Bottom Line On Gazprom’s P/E Ratio
Gazprom has a P/E of 3.1. That’s below the average in the RU market, which is 6.8. The EPS growth last year was strong, and debt levels are quite reasonable. The low P/E ratio suggests current market expectations are muted, implying these levels of growth will not continue.
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 visual report on analyst forecasts could hold the key to an excellent investment decision.
Of course you might be able to find a better stock than Gazprom. So you may wish to see this free collection of other companies that have grown earnings strongly.
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.