This analysis is intended to introduce important early concepts to people who are starting to invest and want to begin learning the link between Joint Stock Company “World Trade Center Moscow” (MCX:WTCM)’s fundamentals and stock market performance.
Joint Stock Company “World Trade Center Moscow” (MCX:WTCM) trades with a trailing P/E of 47x, which is higher than the industry average of 8.9x. 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. Today, 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 P/E ratio
P/E is often used for relative valuation since earnings power is a chief driver of investment value. By comparing a stock’s price per share to its earnings per share, we are able to see 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 = RUB7.4
Earnings per share = RUB0.158
∴ Price-Earnings Ratio = RUB7.4 ÷ RUB0.158 = 47x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against 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 WTCM, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use below. Since it is expected that similar companies have similar P/E ratios, we can come to some conclusions about the stock if the ratios are different.
At 47x, WTCM’s P/E is higher than its industry peers (8.9x). 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 peer group actually contains companies that are similar to WTCM. If this isn’t the case, the difference in P/E could be due to some other factors. For example, if you are inadvertently comparing riskier firms with WTCM, then WTCM’s P/E would naturally be higher than its peers since investors would reward its lower risk with a higher price. The other possibility is if you were accidentally comparing lower growth firms with WTCM. In this case, WTCM’s P/E would be higher since investors would also reward WTCM’s higher growth with a higher price. 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:
You may have already conducted fundamental analysis on the stock as a shareholder, so its current overvaluation could signal a potential selling opportunity to reduce your exposure to WTCM. Now that you understand the ins and outs of the PE metric, you should know to bear in mind its limitations before you make an investment decision. 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.