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What Does Assicurazioni Generali S.p.A.'s (BIT:G) P/E Ratio Tell You?

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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll show how you can use Assicurazioni Generali S.p.A.'s (BIT:G) P/E ratio to inform your assessment of the investment opportunity. Assicurazioni Generali has a P/E ratio of 13.12, based on the last twelve months. That corresponds to an earnings yield of approximately 7.6%.

View our latest analysis for Assicurazioni Generali

How Do I Calculate Assicurazioni Generali's Price To Earnings Ratio?

The formula for price to earnings is:

Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)

Or for Assicurazioni Generali:

P/E of 13.12 = €18.66 ÷ €1.42 (Based on the year to June 2019.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each €1 of company earnings. That isn't necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.

Does Assicurazioni Generali Have A Relatively High Or Low P/E For Its Industry?

The P/E ratio essentially measures market expectations of a company. The image below shows that Assicurazioni Generali has a higher P/E than the average (11.2) P/E for companies in the insurance industry.

BIT:G Price Estimation Relative to Market, November 25th 2019
BIT:G Price Estimation Relative to Market, November 25th 2019

Its relatively high P/E ratio indicates that Assicurazioni Generali shareholders think it will perform better than other companies in its industry classification. Clearly the market expects growth, but it isn't guaranteed. So investors should delve deeper. I like to check if company insiders have been buying or selling.

How Growth Rates Impact P/E Ratios

Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

Assicurazioni Generali's earnings per share were pretty steady over the last year. But EPS is up 7.2% over the last 5 years.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).

While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.

So What Does Assicurazioni Generali's Balance Sheet Tell Us?

Assicurazioni Generali's net debt equates to 49% of its market capitalization. While it's worth keeping this in mind, it isn't a worry.

The Verdict On Assicurazioni Generali's P/E Ratio

Assicurazioni Generali has a P/E of 13.1. That's below the average in the IT market, which is 17.7. With only modest debt, it's likely the lack of EPS growth at least partially explains the pessimism implied by the P/E ratio.

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.