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What Is Assicurazioni Generali's (BIT:G) P/E Ratio After Its Share Price Tanked?

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Simply Wall St
·4 min read
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To the annoyance of some shareholders, Assicurazioni Generali (BIT:G) shares are down a considerable 36% in the last month. The recent drop has obliterated the annual return, with the share price now down 26% over that longer period.

All else being equal, a share price drop should make a stock more attractive to potential investors. In the long term, share prices tend to follow earnings per share, but in the short term prices bounce around in response to short term factors (which are not always obvious). The implication here is that long term investors have an opportunity when expectations of a company are too low. One way to gauge market expectations of a stock 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.

See our latest analysis for Assicurazioni Generali

How Does Assicurazioni Generali's P/E Ratio Compare To Its Peers?

Assicurazioni Generali's P/E of 8.62 indicates some degree of optimism towards the stock. As you can see below, Assicurazioni Generali has a higher P/E than the average company (7.6) in the insurance industry.

BIT:G Price Estimation Relative to Market, March 16th 2020
BIT:G Price Estimation Relative to Market, March 16th 2020

Assicurazioni Generali's P/E tells us that market participants think the company will perform better than its industry peers, going forward. 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.

How Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. 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. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Assicurazioni Generali increased earnings per share by 2.5% last year. And its annual EPS growth rate over 5 years is 4.6%.

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. Thus, the metric does not reflect cash or debt held by the company. 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).

How Does Assicurazioni Generali's Debt Impact Its P/E Ratio?

Assicurazioni Generali has net debt worth 69% of its market capitalization. This is a reasonably significant level of debt -- all else being equal you'd expect a much lower P/E than if it had net cash.

The Bottom Line On Assicurazioni Generali's P/E Ratio

Assicurazioni Generali's P/E is 8.6 which is below average (12.9) in the IT market. The meaningful debt load is probably contributing to low expectations, even though it has improved earnings recently. Given Assicurazioni Generali's P/E ratio has declined from 13.4 to 8.6 in the last month, we know for sure that the market is more worried about the business today, than it was back then. For those who prefer invest in growth, this stock apparently offers limited promise, but the deep value investors may find the pessimism around this stock enticing.

When the market is wrong about a stock, it gives savvy investors an opportunity. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.

Of course you might be able to find a better stock than Assicurazioni Generali. 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 editorial-team@simplywallst.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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.