The current price of ENRU places the company at a fair trailing PE of 6.55x, which isn’t too different to the 6.02x average multiple of the Electric Utilities. But can investors make a closing judgement of the company’s value based on this multiple? The answer is no, since important variables like the company’s potential to grow and debt levels are ignored in the PE’s calculation. This article will cover some key aspects we should consider in order to determine the best multiple to be used for ENRU. Let’s take a look below.
Is ENRU making any money?
PE is only used when a company is profitable, such as ENRU. This is because the multiple is not applicable to companies that are not generating positive earnings. Other useful measures can be employed to evaluate companies in this situation, such as price-to-free-cash-flow or price-to-sales where it is suitable. Negative earnings have featured on ENRU’s bottom line previously, until 2016 saw a breakeven period with earnings of RUруб4.39b, followed by the most recent bottom-line of RUруб7.80b. This means an earnings-based multiple such as the PE ratio can be a useful valuation instrument, but let’s see if there is a better alternative.
Does ENRU owe a lot of money?
Generally, debt should be below 40% of equity. Given that ’s debt-to-equity ratio is currently 52.72%, there’s room for improvement. This ratio indicates that for every RUB1 you invest, the company owes RUB0.53 to debtors. Although debt can be a cheaper source of capital, it also brings with it some risks around debt obligations and bankruptcy. Debt levels matter when valuing the business because in theory ENRU’s share price represents the equity portion only, but its important to account for debt, as using leverage alters the capital structure, and influences the risk and performance of the business. This can be done using enterprise value (EV) instead of share price. EV adds in debt and subtracts cash in order to recognise both sources of funding and is commonly used in the EV/EBITDA multiple.
ENRU’s EV/EBITDA = RUруб69.30b / RUруб0 = 4.19x
Will ENRU experience high growth?
According to analyst forecasts, investors should expect a rather steady, but somewhat insignificant, decline in earnings of -6.66% year-on-year. Therefore it isn’t essential to adjust our EV/EBITDA multiple to reflect future expectations because the future isn’t expected to look too different from the present. If this wasn’t the case, I would suggest using a future estimate of ENRU’s EBITDA to calculate a “forward” EV/EBITDA, which results in a similar multiple to its “trailing” of 4.19x.
Next Steps:Basing your investment decision based on relative valuation metrics alone is certainly no sufficient. There are many important factors I have not taken into account in this article. If you have not done so already, I urge you to complete your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for ’s future growth? Take a look at our free research report of analyst consensus for ’s outlook.
- Past Track Record: Has 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 ‘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.