This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll show how you can use Public Joint Stock Company Territorial Generation Company No 14’s (MCX:TGKN) P/E ratio to inform your assessment of the investment opportunity. Territorial Generation Company No. 14 has a P/E ratio of 14.52, based on the last twelve months. That corresponds to an earnings yield of approximately 6.9%.
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Territorial Generation Company No. 14:
P/E of 14.52 = RUB0.0053 ÷ RUB0.00036 (Based on the trailing twelve months to June 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. That isn’t necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
How Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.
Territorial Generation Company No. 14 shrunk earnings per share by 65% over the last year. But over the longer term (5 years) earnings per share have increased by 12%.
How Does Territorial Generation Company No. 14’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. As you can see below, Territorial Generation Company No. 14 has a higher P/E than the average company (5.4) in the electric utilities industry.
Its relatively high P/E ratio indicates that Territorial Generation Company No. 14 shareholders think it will perform better than other companies in its industry classification. Shareholders are clearly optimistic, but the future is always uncertain. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
Don’t forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. Theoretically, a business can improve its earnings (and produce a lower P/E in the future), by taking on debt (or spending its remaining cash).
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).
Territorial Generation Company No. 14’s Balance Sheet
Territorial Generation Company No. 14’s net debt is 38% of its market cap. This is enough debt that you’d have to make some adjustments before using the P/E ratio to compare it to a company with net cash.
The Bottom Line On Territorial Generation Company No. 14’s P/E Ratio
Territorial Generation Company No. 14 trades on a P/E ratio of 14.5, which is above the RU market average of 6.3. With a bit of debt, but a lack of recent growth, it’s safe to say the market is expecting improved profit performance from the company, in the next few years.
When the market is wrong about a stock, it gives savvy investors an opportunity. People often underestimate remarkable growth — so investors can make money when fast growth is not fully appreciated. We don’t have analyst forecasts, but shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.
You might be able to find a better buy than Territorial Generation Company No. 14. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
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 email@example.com.