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How Does Kinsale Capital Group's (NASDAQ:KNSL) P/E Compare To Its Industry, After Its Big Share Price Gain?

Simply Wall St

Kinsale Capital Group (NASDAQ:KNSL) shareholders are no doubt pleased to see that the share price has had a great month, posting a 36% gain, recovering from prior weakness. Looking back a bit further, we're also happy to report the stock is up 69% in the last year.

Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. 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. So some would prefer to hold off buying when there is a lot of optimism towards a stock. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). A high P/E implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.

See our latest analysis for Kinsale Capital Group

How Does Kinsale Capital Group's P/E Ratio Compare To Its Peers?

Kinsale Capital Group's P/E of 63.37 indicates some degree of optimism towards the stock. As you can see below, Kinsale Capital Group has a much higher P/E than the average company (13.3) in the insurance industry.

NasdaqGS:KNSL Price Estimation Relative to Market May 22nd 2020

That means that the market expects Kinsale Capital Group will outperform other companies in its industry. Shareholders are clearly optimistic, but the future is always uncertain. 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

Earnings growth rates have a big influence on P/E ratios. When earnings grow, the 'E' increases, over time. That means unless the share price increases, the P/E will reduce in a few years. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

Kinsale Capital Group increased earnings per share by 6.5% last year. And earnings per share have improved by 21% annually, over the last five years.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. Thus, the metric does not reflect cash or debt held by the company. 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).

Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).

So What Does Kinsale Capital Group's Balance Sheet Tell Us?

Since Kinsale Capital Group holds net cash of US$29m, it can spend on growth, justifying a higher P/E ratio than otherwise.

The Bottom Line On Kinsale Capital Group's P/E Ratio

Kinsale Capital Group's P/E is 63.4 which suggests the market is more focussed on the future opportunity rather than the current level of earnings. EPS was up modestly better over the last twelve months. And the net cash position provides the company with multiple options. The high P/E suggests the market thinks further growth will come. What is very clear is that the market has become significantly more optimistic about Kinsale Capital Group over the last month, with the P/E ratio rising from 46.4 back then to 63.4 today. For those who prefer to invest with the flow of momentum, that might mean it's time to put the stock on a watchlist, or research it. But the contrarian may see it as a missed opportunity.

Investors should be looking to buy stocks that the market is wrong about. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. 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 Kinsale Capital Group. So you may wish to see this free collection of other companies that have grown earnings strongly.

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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.