Today, we’ll introduce the concept of the P/E ratio for those who are learning about investing. We’ll look at Lipetsk Power Sale Company Open Joint-Stock Company’s (MCX:LPSB) P/E ratio and reflect on what it tells us about the company’s share price. What is Lipetsk Power Sale Company’s P/E ratio? Well, based on the last twelve months it is 29.13. That is equivalent to an earnings yield of about 3.4%.
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Lipetsk Power Sale Company:
P/E of 29.13 = RUB9.50 ÷ RUB0.33 (Based on the trailing twelve months to June 2019.)
Is A High P/E Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
Does Lipetsk Power Sale Company Have A Relatively High Or Low P/E For Its Industry?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. You can see in the image below that the average P/E (7.7) for companies in the electric utilities industry is a lot lower than Lipetsk Power Sale Company’s P/E.
Lipetsk Power Sale Company’s P/E tells us that market participants think the company will perform better than its industry peers, going forward. Clearly the market expects growth, but it isn’t guaranteed. So further research is always essential. I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. If earnings are growing quickly, then the ‘E’ in the equation will increase faster than it would otherwise. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Lipetsk Power Sale Company’s earnings per share fell by 54% in the last twelve months. But EPS is up 12% over the last 3 years. And over the longer term (5 years) earnings per share have decreased 2.8% annually. This might lead to muted expectations.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. So it won’t reflect the advantage of cash, or disadvantage of debt. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).
Is Debt Impacting Lipetsk Power Sale Company’s P/E?
Lipetsk Power Sale Company has net cash of ₽143m. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.
The Bottom Line On Lipetsk Power Sale Company’s P/E Ratio
Lipetsk Power Sale Company has a P/E of 29.1. That’s significantly higher than the average in its market, which is 8.9. The recent drop in earnings per share might keep value investors away, but the healthy balance sheet means the company retains potential for future growth. If fails to eventuate, the current high P/E could prove to be temporary, as the share price falls.
Investors should be looking to buy stocks that the market is wrong about. As value investor Benjamin Graham famously said, ‘In the short run, the market is a voting machine but in the long run, it is a weighing machine. Although we don’t have analyst forecasts you might want to assess this data-rich visualization of earnings, revenue and cash flow.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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