It's really great to see that even after a strong run, Gazprom Gazoraspredelenie Rostov-na-Donu (MCX:RTGZ) shares have been powering on, with a gain of 37% in the last thirty days. That brought the twelve month gain to a very sharp 60%.
Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. The implication here is that deep value investors might steer clear when expectations of a company are too high. Perhaps the simplest way to get a read on investors' expectations of a business is to look at its Price to Earnings Ratio (PE Ratio). A high P/E ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.
Does Gazprom Gazoraspredelenie Rostov-na-Donu Have A Relatively High Or Low P/E For Its Industry?
We can tell from its P/E ratio of 4.07 that sentiment around Gazprom Gazoraspredelenie Rostov-na-Donu isn't particularly high. We can see in the image below that the average P/E (20.7) for companies in the gas utilities industry is higher than Gazprom Gazoraspredelenie Rostov-na-Donu's P/E.
Its relatively low P/E ratio indicates that Gazprom Gazoraspredelenie Rostov-na-Donu shareholders think it will struggle to do as well as other companies in its industry classification. Many investors like to buy stocks when the market is pessimistic about their prospects. You should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the 'E' will be higher. And in that case, the P/E ratio itself will drop rather quickly. Then, a lower P/E should attract more buyers, pushing the share price up.
In the last year, Gazprom Gazoraspredelenie Rostov-na-Donu grew EPS like Taylor Swift grew her fan base back in 2010; the 61% gain was both fast and well deserved. Even better, EPS is up 61% per year over three years. So you might say it really deserves to have an above-average P/E ratio.
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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).
Gazprom Gazoraspredelenie Rostov-na-Donu's Balance Sheet
Gazprom Gazoraspredelenie Rostov-na-Donu has net debt equal to 50% of its market cap. You'd want to be aware of this fact, but it doesn't bother us.
The Verdict On Gazprom Gazoraspredelenie Rostov-na-Donu's P/E Ratio
Gazprom Gazoraspredelenie Rostov-na-Donu's P/E is 4.1 which is below average (8.8) in the RU market. The company hasn't stretched its balance sheet, and earnings growth was good last year. If it continues to grow, then the current low P/E may prove to be unjustified. What is very clear is that the market has become less pessimistic about Gazprom Gazoraspredelenie Rostov-na-Donu over the last month, with the P/E ratio rising from 3.0 back then to 4.1 today. For those who like to invest in turnarounds, that might mean it's time to put the stock on a watchlist, or research it. But others might consider the opportunity to have passed.
Investors should be looking to buy stocks that the market is wrong about. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. Although we don't have analyst forecasts you might want to assess this data-rich visualization of earnings, revenue and cash flow.
Of course you might be able to find a better stock than Gazprom Gazoraspredelenie Rostov-na-Donu. So you may wish to see this free collection of other companies that have grown earnings strongly.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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