This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll look at Hannover Rück SE's (ETR:HNR1) P/E ratio and reflect on what it tells us about the company's share price. Looking at earnings over the last twelve months, Hannover Rück has a P/E ratio of 15.62. That means that at current prices, buyers pay €15.62 for every €1 in trailing yearly profits.
How Do I Calculate Hannover Rück's Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Hannover Rück:
P/E of 15.62 = €173.30 ÷ €11.10 (Based on the trailing twelve months to September 2019.)
Is A High P/E Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. That isn't a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business's prospects, relative to stocks with a lower P/E.
Does Hannover Rück Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio indicates whether the market has higher or lower expectations of a company. As you can see below, Hannover Rück has a higher P/E than the average company (12.0) in the insurance industry.
Its relatively high P/E ratio indicates that Hannover Rück shareholders think it will perform better than other companies in its industry classification. The market is optimistic about the future, but that doesn't guarantee future growth. So investors 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.
It's great to see that Hannover Rück grew EPS by 18% in the last year. And its annual EPS growth rate over 5 years is 6.9%. So one might expect an above average P/E ratio.
Remember: P/E Ratios Don't Consider The Balance Sheet
The 'Price' in P/E reflects the market capitalization of the company. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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 Hannover Rück's Balance Sheet Tell Us?
The extra options and safety that comes with Hannover Rück's €353m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.
The Bottom Line On Hannover Rück's P/E Ratio
Hannover Rück trades on a P/E ratio of 15.6, which is below the DE market average of 21.0. It grew its EPS nicely over the last year, and the healthy balance sheet implies there is more potential for growth. One might conclude that the market is a bit pessimistic, given the low P/E ratio.
Investors have an opportunity when market expectations about a stock are wrong. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.
You might be able to find a better buy than Hannover Rück. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
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.
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.