Is Public Joint-stock Company TNS energo Mari El’s (MCX:MISB) PE Ratio A Signal To Buy For Investors?

This article is intended for those of you who are at the beginning of your investing journey and want to start learning about core concepts of fundamental analysis on practical examples from today’s market.

Public Joint-stock Company TNS energo Mari El (MCX:MISB) is trading with a trailing P/E of 4.9x, which is lower than the industry average of 5.9x. Although some investors may jump to the conclusion that this is a great buying opportunity, understanding the assumptions behind the P/E ratio might change your mind. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for.

View our latest analysis for TNS energo Mari El

Breaking down the Price-Earnings ratio

MISX:MISB PE PEG Gauge August 16th 18
MISX:MISB PE PEG Gauge August 16th 18

The P/E ratio is one of many ratios used in 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.

Formula

Price-Earnings Ratio = Price per share ÷ Earnings per share

P/E Calculation for MISB

Price per share = RUB8.45

Earnings per share = RUB1.712

∴ Price-Earnings Ratio = RUB8.45 ÷ RUB1.712 = 4.9x

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. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to MISB, such as capital structure and profitability. 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.

At 4.9x, MISB’s P/E is lower than its industry peers (5.9x). This implies that investors are undervaluing each dollar of MISB’s earnings. This multiple is a median of profitable companies of 24 Electric Utilities companies in RU including Territorial Generation Company No.2, Volgogradenergosbyt and Rosseti. Therefore, according to this analysis, MISB is an under-priced stock.

A few caveats

While our conclusion might prompt you to buy MISB immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to MISB. If the companies aren’t similar, the difference in P/E might be a result of other factors. For example, if you accidentally compared higher growth firms with MISB, then MISB’s P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. Alternatively, if you inadvertently compared less risky firms with MISB, MISB’s P/E would again be lower since investors would reward its peers’ lower risk with a higher price as well. The second assumption that must hold true is that the stocks we are comparing MISB to are fairly valued by the market. If this assumption does not hold true, MISB’s lower P/E ratio may be because firms in our peer group are being overvalued by the market.

MISX:MISB Future Profit August 16th 18
MISX:MISB Future Profit August 16th 18

What this means for you:

You may have already conducted fundamental analysis on the stock as a shareholder, so its current undervaluation could signal a good buying opportunity to increase your exposure to MISB. 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 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 MISB’s future growth? Take a look at our free research report of analyst consensus for MISB’s outlook.
  2. Past Track Record: Has MISB 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 MISB’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.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.