Despite Its High P/E Ratio, Is Ryazan Energy Retail Company Public Joint-Stock Company (MCX:RZSB) Still Undervalued?

Today, we’ll introduce the concept of the P/E ratio for those who are learning about investing. We’ll look at Ryazan Energy Retail Company Public Joint-Stock Company’s (MCX:RZSB) P/E ratio and reflect on what it tells us about the company’s share price. What is Ryazan Energy Retail Company’s P/E ratio? Well, based on the last twelve months it is 7.5. That is equivalent to an earnings yield of about 13%.

View our latest analysis for Ryazan Energy Retail Company

How Do I Calculate A Price To Earnings Ratio?

The formula for P/E is:

Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)

Or for Ryazan Energy Retail Company:

P/E of 7.5 = RUB3.96 ÷ RUB0.53 (Based on the year to December 2018.)

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 isn’t a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business’s prospects, relative to stocks with a lower P/E.

How Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the ‘E’ increases, over time. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. Then, a lower P/E should attract more buyers, pushing the share price up.

It’s nice to see that Ryazan Energy Retail Company grew EPS by a stonking 46% in the last year. And it has improved its earnings per share by 121% per year over the last three years. With that performance, I would expect it to have an above average P/E ratio.

How Does Ryazan Energy Retail Company’s P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. You can see in the image below that the average P/E (6.8) for companies in the electric utilities industry is lower than Ryazan Energy Retail Company’s P/E.

MISX:RZSB Price Estimation Relative to Market, April 9th 2019
MISX:RZSB Price Estimation Relative to Market, April 9th 2019

Its relatively high P/E ratio indicates that Ryazan Energy Retail Company shareholders think it will perform better than other companies in its industry classification. Clearly the market expects growth, but it isn’t guaranteed. So further research is always essential. I often monitor director buying and selling.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

The ‘Price’ in P/E reflects the market capitalization of the company. Thus, the metric does not reflect cash or debt held by the company. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

While growth expenditure doesn’t always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.

So What Does Ryazan Energy Retail Company’s Balance Sheet Tell Us?

Ryazan Energy Retail Company has net cash of RUруб310m. This is fairly high at 38% of its market capitalization. That might mean balance sheet strength is important to the business, but should also help push the P/E a bit higher than it would otherwise be.

The Verdict On Ryazan Energy Retail Company’s P/E Ratio

Ryazan Energy Retail Company trades on a P/E ratio of 7.5, which is fairly close to the RU market average of 7.4. The excess cash it carries is the gravy on top its fast EPS growth. So based on this analysis we’d expect Ryazan Energy Retail Company to have a higher P/E ratio.

When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. We don’t have analyst forecasts, but you might want to assess this data-rich visualization of earnings, revenue and cash flow.

But note: Ryazan Energy Retail Company may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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. Thank you for reading.