Why Public Joint Stock Company Polyus's (MCX:PLZL) High P/E Ratio Isn't Necessarily A Bad Thing

Simply Wall St

Sat, Jun 1, 2019, 2:27 AM

Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll show how you can use Public Joint Stock Company Polyus's (MCX:PLZL) P/E ratio to inform your assessment of the investment opportunity. Polyus has a price to earnings ratio of 13.88, based on the last twelve months. That means that at current prices, buyers pay RUB13.88 for every RUB1 in trailing yearly profits.

See our latest analysis for Polyus

How Do You Calculate Polyus's P/E Ratio?

The formula for P/E is:

Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)

Or for Polyus:

P/E of 13.88 = RUB5170.5 ÷ RUB372.41 (Based on the trailing twelve months to March 2019.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio implies that investors pay a higher price for the earning power of the business. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.

How Growth Rates Impact P/E Ratios

Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. Earnings growth means that in the future the 'E' will be higher. That means unless the share price increases, the P/E will reduce in a few years. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

Polyus shrunk earnings per share by 15% over the last year. But over the longer term (5 years) earnings per share have increased by 37%.

Does Polyus Have A Relatively High Or Low P/E For Its Industry?

We can get an indication of market expectations by looking at the P/E ratio. The image below shows that Polyus has a higher P/E than the average (5.6) P/E for companies in the metals and mining industry.

MISX:PLZL Price Estimation Relative to Market, June 1st 2019

That means that the market expects Polyus will outperform other companies in its industry. The market is optimistic about the future, but that doesn't guarantee future growth. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. So it won't reflect the advantage of cash, or disadvantage of debt. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.