In This Article:
Central Telegraph Public Joint Stock Company (MISX:CNTL) is currently trading at a trailing P/E of 178.5x, which is higher than the industry average of 17.7x. While CNTL might seem like a stock to avoid or sell if you own it, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. In this article, I will explain what the P/E ratio is as well as what you should look out for when using it. See our latest analysis for Central Telegraph
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 CNTL
Price-Earnings Ratio = Price per share ÷ Earnings per share
CNTL Price-Earnings Ratio = RUB16.1 ÷ RUB0.09 = 178.5x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to CNTL, such as capital structure and profitability. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. CNTL’s P/E of 178.5x is higher than its industry peers (17.7x), which implies that each dollar of CNTL’s earnings is being overvalued by investors. As such, our analysis shows that CNTL represents an over-priced stock.
Assumptions to watch out for
While our conclusion might prompt you to sell your CNTL shares immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to CNTL, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with CNTL, 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 CNTL to are fairly valued by the market. If this does not hold, there is a possibility that CNTL’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
You may have already conducted fundamental analysis on the stock as a shareholder, so its current overvaluation could signal a potential selling opportunity to reduce your exposure to CNTL. Now that you understand the ins and outs of the PE metric, you should know to bear in mind its limitations before you make an investment decision. 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: