Joint Stock Company “World Trade Center Moscow” (MISX:WTCM) is trading with a trailing P/E of 50.9x, which is higher than the industry average of 10x. While WTCM 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. See our latest analysis for World Trade Center Moscow
Breaking down the Price-Earnings ratio
P/E is a popular ratio used for 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 WTCM
Price per share = RUB8.05
Earnings per share = RUB0.158
∴ Price-Earnings Ratio = RUB8.05 ÷ RUB0.158 = 50.9x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. Ideally, we want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as WTCM, such as size and country of operation. 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 50.9x, WTCM’s P/E is higher than its industry peers (10x). This implies that investors are overvaluing each dollar of WTCM’s earnings. Therefore, according to this analysis, WTCM is an over-priced stock.
A few caveats
While our conclusion might prompt you to sell your WTCM shares immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to WTCM. If the companies aren’t similar, the difference in P/E might be a result of other factors. For example, if you accidentally compared lower growth firms with WTCM, then WTCM’s P/E would naturally be higher since investors would reward WTCM’s higher growth with a higher price. Alternatively, if you inadvertently compared riskier firms with WTCM, WTCM’s P/E would again be higher since investors would reward WTCM’s lower risk with a higher price as well. The second assumption that must hold true is that the stocks we are comparing WTCM to are fairly valued by the market. If this does not hold, there is a possibility that WTCM’s P/E is higher because firms in our peer group are being undervalued by the market.
What this means for you:
If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to rebalance your portfolio and reduce your holdings in WTCM. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned 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 WTCM’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 WTCM 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 WTCM’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.