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Public Joint-Stock Energy and Electrification Company Samaraenergo (MISX:SAGO) trades with a trailing P/E of 4.2x, which is lower than the industry average of 14.8x. While this makes SAGO appear like a great stock to buy, you might change your mind after I explain the assumptions behind the P/E ratio. In this article, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. View our latest analysis for Energy and Electrification Company Samaraenergo
Breaking down the P/E ratio
The P/E ratio is a popular ratio used in relative valuation since earnings power is a key driver of investment value. It compares a stock’s price per share to the stock’s earnings per share. A more intuitive way of understanding the P/E ratio is to think of it as how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for SAGO
Price-Earnings Ratio = Price per share ÷ Earnings per share
SAGO Price-Earnings Ratio = RUB0.4 ÷ RUB0.094 = 4.2x
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 want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as SAGO, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use. At 4.2x, SAGO’s P/E is lower than its industry peers (14.8x). This implies that investors are undervaluing each dollar of SAGO’s earnings. Therefore, according to this analysis, SAGO is an under-priced stock.
A few caveats
Before you jump to the conclusion that SAGO is the perfect buying opportunity, it is important to realise that our conclusion rests on two assertions. Firstly, our peer group contains companies that are similar to SAGO. 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 SAGO, 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 SAGO to are fairly valued by the market. If this is violated, SAGO’s P/E may be lower than its peers as they are actually overvalued by investors.
To help readers see pass 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.