Is It Time To Sell Public Joint-Stock Company Enel Russia (MCX:ENRU) Based Off Its PE Ratio?

Public Joint-Stock Company Enel Russia (MISX:ENRU) trades with a trailing P/E of 6.2x, which is higher than the industry average of 6.2x. While ENRU 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 deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. See our latest analysis for Enel Russia

Demystifying the P/E ratio

A common ratio used for relative valuation is the P/E ratio. 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.

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. Ideally, we want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as ENRU, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use below. 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.

ENRU’s P/E of 6.2x is higher than its industry peers (6.2x), which implies that each dollar of ENRU’s earnings is being overvalued by investors. Therefore, according to this analysis, ENRU is an over-priced stock.

A few caveats

While our conclusion might prompt you to sell your ENRU 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 ENRU. If this isn’t the case, the difference in P/E could be due to some other factors. For example, if you inadvertently compared riskier firms with ENRU, then investors would naturally value ENRU at a higher price since it is a less risky investment. Similarly, if you accidentally compared lower growth firms with ENRU, investors would also value ENRU at a higher price since it is a higher growth investment. Both scenarios would explain why ENRU has a higher P/E ratio than its peers. The second assumption that must hold true is that the stocks we are comparing ENRU to are fairly valued by the market. If this does not hold, there is a possibility that ENRU’s P/E is higher because firms in our peer group are being undervalued by the market.

What this means for you:

Since you may have already conducted your due diligence on ENRU, 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 highly recommend you to complete your research by taking a look at the following:

1. Future Outlook: What are well-informed industry analysts predicting for ENRU’s future growth? Take a look at our free research report of analyst consensus for ENRU’s outlook.
2. Past Track Record: Has ENRU 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 ENRU's historicals for more clarity.
3. 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.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.