Interregional Distribution Grid Company of Siberia (MCX:MRKS) shareholders are no doubt pleased to see that the share price has had a great month, posting a 32% gain, recovering from prior weakness. Zooming out, the annual gain of 174% knocks our socks off.
All else being equal, a sharp share price increase should make a stock less attractive to potential investors. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. The implication here is that deep value investors might steer clear when expectations of a company are too high. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). A high P/E implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.
See our latest analysis for Interregional Distribution Grid Company of Siberia
How Does Interregional Distribution Grid Company of Siberia’s P/E Ratio Compare To Its Peers?
We can tell from its P/E ratio of 41.16 that there is some investor optimism about Interregional Distribution Grid Company of Siberia. The image below shows that Interregional Distribution Grid Company of Siberia has a significantly higher P/E than the average (7.3) P/E for companies in the electric utilities industry.
MISX:MRKS Price Estimation Relative to Market, December 15th 2019
That means that the market expects Interregional Distribution Grid Company of Siberia will outperform other companies in its industry. The market is optimistic about the future, but that doesn’t guarantee future growth. So investors should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
Generally speaking the rate of earnings growth has a profound impact on a company’s P/E multiple. If earnings are growing quickly, then the ‘E’ in the equation will increase faster than it would otherwise. And in that case, the P/E ratio itself will drop rather quickly. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Interregional Distribution Grid Company of Siberia saw earnings per share decrease by 56% last year. And over the longer term (5 years) earnings per share have decreased 18% annually. This growth rate might warrant a below average P/E ratio.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. 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 investing in growth. That means taking on debt (or spending its cash).
Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.
So What Does Interregional Distribution Grid Company of Siberia’s Balance Sheet Tell Us?
Net debt totals a substantial 133% of Interregional Distribution Grid Company of Siberia’s market cap. If you want to compare its P/E ratio to other companies, you must keep in mind that these debt levels would usually warrant a relatively low P/E.
The Bottom Line On Interregional Distribution Grid Company of Siberia’s P/E Ratio
Interregional Distribution Grid Company of Siberia’s P/E is 41.2 which is way above average (7.6) in its market. With significant debt and no EPS growth last year, shareholders are betting on an improvement in earnings from the company. What we know for sure is that investors have become much more excited about Interregional Distribution Grid Company of Siberia recently, since they have pushed its P/E ratio from 31.3 to 41.2 over the last month. If you like to buy stocks that have recently impressed the market, then this one might be a candidate; but if you prefer to invest when there is ‘blood in the streets’, then you may feel the opportunity has passed.
Investors have an opportunity when market expectations about a stock are wrong. People often underestimate remarkable growth — so investors can make money when fast growth is not fully appreciated. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
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 protected]. 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.
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. Thank you for reading.
