In This Article:
KAMAZ Publicly Traded Company (MISX:KMAZ) is trading with a trailing P/E of 10.3x, which is higher than the industry average of 6.9x. 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 break down what the P/E ratio is, how to interpret it and what to watch out for. See our latest analysis for KAMAZ Publicly Traded
Breaking down the Price-Earnings ratio
The P/E ratio is one of many ratios used in relative valuation. 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 KMAZ
Price-Earnings Ratio = Price per share ÷ Earnings per share
KMAZ Price-Earnings Ratio = RUB53 ÷ RUB5.136 = 10.3x
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. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to KMAZ, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. KMAZ’s P/E of 10.3x is higher than its industry peers (6.9x), which implies that each dollar of KMAZ’s earnings is being overvalued by investors. As such, our analysis shows that KMAZ represents an over-priced stock.
A few caveats
While our conclusion might prompt you to sell your KMAZ shares immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to KMAZ. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared higher growth firms with KMAZ, then its P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing KMAZ to are fairly valued by the market. If this does not hold, there is a possibility that KMAZ’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to rebalance your portfolio and reduce your holdings in KMAZ. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned above. 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: