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How Does General Insurance Corporation of India's (NSE:GICRE) P/E Compare To Its Industry, After Its Big Share Price Gain?

Simply Wall St

General Insurance Corporation of India (NSE:GICRE) shares have continued recent momentum with a 31% gain in the last month alone. But shareholders may not all be feeling jubilant, since the share price is still down 12% in the last year.

All else being equal, a sharp share price increase should make a stock less attractive to potential investors. 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. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.

View our latest analysis for General Insurance Corporation of India

Does General Insurance Corporation of India Have A Relatively High Or Low P/E For Its Industry?

We can tell from its P/E ratio of 22.96 that sentiment around General Insurance Corporation of India isn't particularly high. We can see in the image below that the average P/E (54.7) for companies in the insurance industry is higher than General Insurance Corporation of India's P/E.

NSEI:GICRE Price Estimation Relative to Market, November 7th 2019

This suggests that market participants think General Insurance Corporation of India will underperform other companies in its industry. Since the market seems unimpressed with General Insurance Corporation of India, it's quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.

How Growth Rates Impact P/E Ratios

If earnings fall then in the future the 'E' will be lower. That means even if the current P/E is low, it will increase over time if the share price stays flat. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.

General Insurance Corporation of India shrunk earnings per share by 34% over the last year. And EPS is down 2.5% a year, over the last 5 years. This could justify a pessimistic P/E.

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

The 'Price' in P/E reflects the market capitalization of the company. That means it doesn't take debt or cash into account. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.

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.

Is Debt Impacting General Insurance Corporation of India's P/E?

With net cash of ₹139b, General Insurance Corporation of India has a very strong balance sheet, which may be important for its business. Having said that, at 28% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.

The Verdict On General Insurance Corporation of India's P/E Ratio

General Insurance Corporation of India's P/E is 23.0 which is above average (13.5) in its market. Falling earnings per share is probably keeping traditional value investors away, but the relatively strong balance sheet will allow the company time to invest in growth. Clearly, the high P/E indicates shareholders think it will! What is very clear is that the market has become significantly more optimistic about General Insurance Corporation of India over the last month, with the P/E ratio rising from 17.6 back then to 23.0 today. If you like to buy stocks that have recently impressed the market, then this one might be a candidate; but if you prefer to invest when there is 'blood in the streets', then you may feel the opportunity has passed.

Investors have an opportunity when market expectations about a stock are wrong. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

But note: General Insurance Corporation of India may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

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.

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. Thank you for reading.