PIK Group Public Joint Stock Company (MISX:PIKK) is trading with a trailing P/E of 78.7x, which is higher than the industry average of 15.9x. While this makes PIKK appear like a stock to avoid or sell if you own it, you might change your mind after I explain the assumptions behind the P/E ratio. 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 PIK Group
Breaking down the P/E ratio
The P/E ratio is one of many ratios used in relative valuation. 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 PIKK
Price-Earnings Ratio = Price per share ÷ Earnings per share
PIKK Price-Earnings Ratio = RUB306.3 ÷ RUB3.892 = 78.7x
On its own, the P/E ratio doesn’t tell you much; however, it becomes extremely useful 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 PIKK, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use. Since PIKK’s P/E of 78.7x is higher than its industry peers (15.9x), it means that investors are paying more than they should for each dollar of PIKK’s earnings. As such, our analysis shows that PIKK represents an over-priced stock.
Assumptions to be aware of
Before you jump to the conclusion that PIKK should be banished from your portfolio, it is important to realise that our conclusion rests on two assertions. The first is that our “similar companies” are actually similar to PIKK, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with PIKK, 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 PIKK to are fairly valued by the market. If this does not hold true, PIKK’s lower P/E ratio may be because firms in our peer group are 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 PIKK. 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 highly recommend you to complete your research by taking a look at the following: