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Chelyabinsky Plant for Profiled Metal Floor Decking Public Joint-Stock Company (MISX:PRFN) is trading with a trailing P/E of 19.9x, which is higher than the industry average of 6.8x. 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 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 Chelyabinsky Plant for Profiled Metal Floor Decking
What you need to know about the P/E ratio
P/E is often used for relative valuation since earnings power is a chief driver of investment value. 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 PRFN
Price-Earnings Ratio = Price per share ÷ Earnings per share
PRFN Price-Earnings Ratio = RUB1.81 ÷ RUB0.091 = 19.9x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to PRFN, such as company lifetime and products sold. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. Since PRFN’s P/E of 19.9x is higher than its industry peers (6.8x), it means that investors are paying more than they should for each dollar of PRFN’s earnings. Therefore, according to this analysis, PRFN is an over-priced stock.
A few caveats
However, before you rush out to sell your PRFN 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 PRFN. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you are comparing lower risk firms with PRFN, then its P/E would naturally be lower than its peers, as investors would value those with lower risk at a higher price. The second assumption that must hold true is that the stocks we are comparing PRFN to are fairly valued by the market. If this is violated, PRFN’s P/E may be lower than its peers as they are actually overvalued by investors.
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 PRFN. 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: