Yahoo Finance Should You Be Tempted To Buy Public Joint Stock Company ARMADA (MCX:ARMD) At Its Current PE Ratio?
Public Joint Stock Company ARMADA (MISX:ARMD) trades with a trailing P/E of 1x, which is lower than the industry average of 23.2x. Although some investors may jump to the conclusion that this is a great buying opportunity, understanding the assumptions behind the P/E ratio might change your mind. In this article, 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 ARMADA
Breaking down the Price-Earnings ratio
The P/E ratio is one of many ratios used in 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 ARMD
Price-Earnings Ratio = Price per share ÷ Earnings per share
ARMD Price-Earnings Ratio = RUB10.3 ÷ RUB10.058 = 1x
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 ARMD, 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 ARMD’s P/E of 1x is lower than its industry peers (23.2x), it means that investors are paying less than they should for each dollar of ARMD’s earnings. Therefore, according to this analysis, ARMD is an under-priced stock.
Assumptions to be aware of
However, before you rush out to buy ARMD, it is important to note that this conclusion is based on two key assumptions. The first is that our “similar companies” are actually similar to ARMD, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with ARMD, 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 ARMD to are fairly valued by the market. If this does not hold true, ARMD’s lower P/E ratio may be because firms in our peer group are 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 add more of ARMD to your portfolio. 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 highly recommend you to complete your research by taking a look at the following:
Financial Health: Is ARMD’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 ARMD 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 ARMD’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.
