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Astrakhan Power Sale Company Public Joint Stock Company (MISX:ASSB) is trading with a trailing P/E of 9.4x, which is higher than the industry average of 6.4x. Although some investors may jump to the conclusion that you should avoid the stock or sell if you own it, understanding the assumptions behind the P/E ratio might change your mind. Today, I will explain what the P/E ratio is as well as what you should look out for when using it. Check out our latest analysis for Astrakhan Power Sale Company
Breaking down the P/E 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.
P/E Calculation for ASSB
Price-Earnings Ratio = Price per share ÷ Earnings per share
ASSB Price-Earnings Ratio = RUB0.43 ÷ RUB0.046 = 9.4x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful 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 ASSB, such as capital structure and profitability. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. At 9.4x, ASSB’s P/E is higher than its industry peers (6.4x). This implies that investors are overvaluing each dollar of ASSB’s earnings. Therefore, according to this analysis, ASSB is an over-priced stock.
Assumptions to be aware of
However, before you rush out to sell your ASSB shares, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to ASSB. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared lower risk firms with ASSB, then investors would naturally value it at a lower price since it is a riskier investment. The second assumption that must hold true is that the stocks we are comparing ASSB to are fairly valued by the market. If this is violated, ASSB’s P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
Since you may have already conducted your due diligence on ASSB, the overvaluation of the stock may mean it is a good time to reduce your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I’ve outlined 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 urge you to complete your research by taking a look at the following: