Yahoo Finance Does Public joint stock company ROSBANK’s (MCX:ROSB) PE Ratio Signal A Selling Opportunity?
Public joint stock company ROSBANK (MISX:ROSB) is currently trading at a trailing P/E of 8.9x, which is higher than the industry average of 5.7x. While this makes ROSB 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 deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. See our latest analysis for ROSBANK
Breaking down the P/E ratio
P/E is a popular ratio used for 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 ROSB
Price-Earnings Ratio = Price per share ÷ Earnings per share
ROSB Price-Earnings Ratio = RUB59.9 ÷ RUB6.701 = 8.9x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to ROSB, such as company lifetime and products sold. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. ROSB’s P/E of 8.9x is higher than its industry peers (5.7x), which implies that each dollar of ROSB’s earnings is being overvalued by investors. As such, our analysis shows that ROSB represents an over-priced stock.
Assumptions to be aware of
Before you jump to the conclusion that ROSB 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 ROSB, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with ROSB, then investors would naturally value it at a lower price since it is a riskier investment. The second assumption that must hold true is that the stocks we are comparing ROSB to are fairly valued by the market. If this is violated, ROSB’s P/E may be lower than its peers as they are actually overvalued by investors.
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 ROSB. 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 urge you to complete your research by taking a look at the following:
Financial Health: Is ROSB’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
Past Track Record: Has ROSB been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of ROSB’s historicals for more clarity.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
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.
