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Public Joint Stock Company Nauka-Telecom (MISX:NSVZ) is trading with a trailing P/E of 151x, which is higher than the industry average of 52.4x. 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 explain what the P/E ratio is as well as what you should look out for when using it. See our latest analysis for Nauka-Telecom
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 NSVZ
Price-Earnings Ratio = Price per share ÷ Earnings per share
NSVZ Price-Earnings Ratio = RUB195 ÷ RUB1.291 = 151x
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 want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as NSVZ, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use. Since NSVZ’s P/E of 151x is higher than its industry peers (52.4x), it means that investors are paying more than they should for each dollar of NSVZ’s earnings. Therefore, according to this analysis, NSVZ is an over-priced stock.
A few caveats
Before you jump to the conclusion that NSVZ should be banished from your portfolio, it is important to realise that our conclusion rests on two assertions. Firstly, our peer group contains companies that are similar to NSVZ. 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 NSVZ, 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 NSVZ to are fairly valued by the market. If this is violated, NSVZ’s P/E may be lower than its peers as they are actually overvalued by investors.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.