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Does ICC Holdings, Inc.'s (NASDAQ:ICCH) P/E Ratio Signal A Buying Opportunity?

Simply Wall St

Unfortunately for some shareholders, the ICC Holdings (NASDAQ:ICCH) share price has dived in the last thirty days. Even longer term holders have taken a real hit with the stock declining 3.8% 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. Perhaps the simplest way to get a read on investors' expectations of a business 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.

See our latest analysis for ICC Holdings

How Does ICC Holdings's P/E Ratio Compare To Its Peers?

We can tell from its P/E ratio of 29.05 that there is some investor optimism about ICC Holdings. You can see in the image below that the average P/E (11.3) for companies in the insurance industry is lower than ICC Holdings's P/E.

NasdaqCM:ICCH Price Estimation Relative to Market, March 1st 2020

ICC Holdings's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Clearly the market expects growth, but it isn't guaranteed. 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

When earnings fall, the 'E' decreases, over time. That means even if the current P/E is low, it will increase over time if the share price stays flat. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.

In the last year, ICC Holdings grew EPS like Taylor Swift grew her fan base back in 2010; the 103% gain was both fast and well deserved. Regrettably, the longer term performance is poor, with EPS down per year over 3 years.

Remember: P/E Ratios Don't Consider The Balance Sheet

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. So it won't reflect the advantage of cash, or disadvantage of debt. 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).

Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.

ICC Holdings's Balance Sheet

ICC Holdings has net debt worth just 3.7% of its market capitalization. So it doesn't have as many options as it would with net cash, but its debt would not have much of an impact on its P/E ratio.

The Verdict On ICC Holdings's P/E Ratio

ICC Holdings has a P/E of 29.0. That's higher than the average in its market, which is 16.5. The company is not overly constrained by its modest debt levels, and its recent EPS growth is nothing short of stand-out. So to be frank we are not surprised it has a high P/E ratio. Given ICC Holdings's P/E ratio has declined from 29.0 to 29.0 in the last month, we know for sure that the market is less confident about the business today, than it was back then. For those who don't like to trade against momentum, that could be a warning sign, but a contrarian investor might want to take a closer look.

Investors have an opportunity when market expectations about a stock are wrong. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. Although we don't have analyst forecasts you might want to assess this data-rich visualization of earnings, revenue and cash flow.

But note: ICC Holdings 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).

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.