1347 Property Insurance Holdings Inc (NASDAQ:PIH) is currently trading at a trailing P/E of 80.5x, which is higher than the industry average of 16.7x. Although some investors may jump to the conclusion that you should avoid the stock or sell if you own it, understanding the assumptions behind the P/E ratio might change your mind. In this article, I will explain what the P/E ratio is as well as what you should look out for when using it. See our latest analysis for 1347 Property Insurance Holdings
Demystifying the P/E ratio
P/E is often used for relative valuation since earnings power is a chief driver of investment value. It compares a stock’s price per share to the stock’s earnings per share. A more intuitive way of understanding the P/E ratio is to think of it as how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for PIH
Price-Earnings Ratio = Price per share ÷ Earnings per share
PIH Price-Earnings Ratio = $6.7 ÷ $0.083 = 80.5x
On its own, the P/E ratio doesn’t tell you much; however, it becomes extremely useful when you compare it with other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to PIH, such as capital structure and profitability. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. Since PIH’s P/E of 80.5x is higher than its industry peers (16.7x), it means that investors are paying more than they should for each dollar of PIH’s earnings. Therefore, according to this analysis, PIH is an over-priced stock.
Assumptions to watch out for
However, before you rush out to sell your PIH shares, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to PIH. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared lower risk firms with PIH, 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 PIH to are fairly valued by the market. If this does not hold true, PIH’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
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.