Public Joint-Stock Company TNS energo Rostov-on-Don (MISX:RTSB) is currently trading at a trailing P/E of 21.4x, which is higher than the industry average of 6x. While RTSB 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. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for. Check out our latest analysis for TNS energo Rostov-on-Don
Breaking down the Price-Earnings ratio
A common ratio used for relative valuation is the P/E ratio. 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 RTSB
Price per share = RUB0.4
Earnings per share = RUB0.018
∴ Price-Earnings Ratio = RUB0.4 ÷ RUB0.018 = 21.4x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. Ideally, we want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as RTSB, such as size and country of operation. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. 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.
Since RTSB’s P/E of 21.4x is higher than its industry peers (6x), it means that investors are paying more than they should for each dollar of RTSB’s earnings. Therefore, according to this analysis, RTSB is an over-priced stock.
Assumptions to be aware of
However, before you rush out to sell your RTSB shares, it is important to note that this conclusion is based on two key assumptions. The first is that our peer group actually contains companies that are similar to RTSB. 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 RTSB, then RTSB’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 RTSB. In this case, RTSB’s P/E would be higher since investors would also reward RTSB’s higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing RTSB to are fairly valued by the market. If this does not hold, there is a possibility that RTSB’s P/E is higher because firms in our peer group are being undervalued by the market.
What this means for you:
If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to rebalance your portfolio and reduce your holdings in RTSB. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned 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:
- Financial Health: Is RTSB’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 RTSB 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 RTSB’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.