Public Stock Company VSMPO-AVISMA Corporation (MISX:VSMO) is trading with a trailing P/E of 10x, which is higher than the industry average of 7x. While VSMO might seem like a stock to avoid or sell if you own it, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for. Check out our latest analysis for Public Stock Company VSMPO-AVISMA
Breaking down the Price-Earnings ratio
The P/E ratio is one of many ratios used in relative valuation. It compares a stock’s price per share to the stock’s earnings per share. A more intuitive way of understanding the P/E ratio is to think of it as how much investors are paying for each dollar of the company’s earnings.
Price-Earnings Ratio = Price per share ÷ Earnings per share
P/E Calculation for VSMO
Price per share = RUB17230
Earnings per share = RUB1721.797
∴ Price-Earnings Ratio = RUB17230 ÷ RUB1721.797 = 10x
On its own, the P/E ratio doesn’t tell you much; however, it becomes extremely useful when you compare it with other similar companies. Ultimately, our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to VSMO, such as company lifetime and products sold. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. Since similar companies should technically have similar P/E ratios, we can very quickly come to some conclusions about the stock if the ratios differ.
At 10x, VSMO’s P/E is higher than its industry peers (7x). This implies that investors are overvaluing each dollar of VSMO’s earnings. As such, our analysis shows that VSMO represents an over-priced stock.
A few caveats
However, before you rush out to sell your VSMO shares, it is important to note that this conclusion is based on two key assumptions. The first is that our “similar companies” are actually similar to VSMO. If the companies aren’t similar, the difference in P/E might be a result of other factors. For example, if you inadvertently compared riskier firms with VSMO, then investors would naturally value VSMO at a higher price since it is a less risky investment. Similarly, if you accidentally compared lower growth firms with VSMO, investors would also value VSMO at a higher price since it is a higher growth investment. Both scenarios would explain why VSMO has a higher P/E ratio than its peers. The second assumption that must hold true is that the stocks we are comparing VSMO to are fairly valued by the market. If this assumption is violated, VSMO’s P/E may be higher than its peers because its peers are actually undervalued by investors.
What this means for you:
Since you may have already conducted your due diligence on VSMO, the overvaluation of the stock may mean it is a good time to reduce your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I’ve outlined above. Remember that basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PE ratio is very one-dimensional. If you have not done so already, I urge you to complete your research by taking a look at the following:
- Financial Health: Is VSMO’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
- Past Track Record: Has VSMO been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of VSMO’s historicals for more clarity.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.