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Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. To keep it practical, we'll show how Public Joint Stock Company KuibyshevAzot's (MCX:KAZT) P/E ratio could help you assess the value on offer. Looking at earnings over the last twelve months, KuibyshevAzot has a P/E ratio of 3.81. That means that at current prices, buyers pay RUB3.81 for every RUB1 in trailing yearly profits.
View our latest analysis for KuibyshevAzot
How Do I Calculate KuibyshevAzot's Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for KuibyshevAzot:
P/E of 3.81 = RUB152.4 ÷ RUB39.97 (Based on the trailing twelve months to December 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each RUB1 the company has earned over the last year. That isn't a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business's prospects, relative to stocks with a lower P/E.
Does KuibyshevAzot Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that KuibyshevAzot has a lower P/E than the average (5.3) P/E for companies in the chemicals industry.
KuibyshevAzot's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with KuibyshevAzot, it's quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. When earnings grow, the 'E' increases, over time. And in that case, the P/E ratio itself will drop rather quickly. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
KuibyshevAzot's 192% EPS improvement over the last year was like bamboo growth after rain; rapid and impressive. The cherry on top is that the five year growth rate was an impressive 39% per year. So I'd be surprised if the P/E ratio was not above average.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. Thus, the metric does not reflect cash or debt held by the company. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).