Despite Its High P/E Ratio, Is Public Joint Stock Company Magnitogorsk Iron & Steel Works (MCX:MAGN) Still Undervalued?

This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll look at Public Joint Stock Company Magnitogorsk Iron & Steel Works’s (MCX:MAGN) P/E ratio and reflect on what it tells us about the company’s share price. Based on the last twelve months, Magnitogorsk Iron & Steel Works’s P/E ratio is 5.85. That corresponds to an earnings yield of approximately 17%.

View our latest analysis for Magnitogorsk Iron & Steel Works

How Do You Calculate Magnitogorsk Iron & Steel Works’s P/E Ratio?

The formula for P/E is:

Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)

Or for Magnitogorsk Iron & Steel Works:

P/E of 5.85 = $0.69 (Note: this is the share price in the reporting currency, namely, USD ) ÷ $0.12 (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 is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the ‘E’ will be higher. 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.

Most would be impressed by Magnitogorsk Iron & Steel Works earnings growth of 11% in the last year. And it has bolstered its earnings per share by 67% per year over the last five years. With that performance, you might expect an above average P/E ratio.

How Does Magnitogorsk Iron & Steel Works’s P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. The image below shows that Magnitogorsk Iron & Steel Works has a higher P/E than the average (3.6) P/E for companies in the metals and mining industry.

MISX:MAGN Price Estimation Relative to Market, March 28th 2019
MISX:MAGN Price Estimation Relative to Market, March 28th 2019

Its relatively high P/E ratio indicates that Magnitogorsk Iron & Steel Works shareholders think it will perform better than other companies in its industry classification. The market is optimistic about the future, but that doesn’t guarantee future growth. So further research is always essential. I often monitor director buying and selling.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

The ‘Price’ in P/E reflects the market capitalization of the company. Thus, the metric does not reflect cash or debt held by the company. Theoretically, a business can improve its earnings (and produce a lower P/E in the future), by taking on debt (or spending its remaining 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.

Magnitogorsk Iron & Steel Works’s Balance Sheet

Magnitogorsk Iron & Steel Works has net cash of US$210m. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.

The Verdict On Magnitogorsk Iron & Steel Works’s P/E Ratio

Magnitogorsk Iron & Steel Works’s P/E is 5.9 which is below average (7.2) in the RU market. The net cash position gives plenty of options to the business, and the recent improvement in EPS is good to see. The below average P/E ratio suggests that market participants don’t believe the strong growth will continue.

When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.

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.

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 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. Thank you for reading.