Here's How P/E Ratios Can Help Us Understand National Western Life Group, Inc. (NASDAQ:NWLI)
Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll show how you can use National Western Life Group, Inc.'s (NASDAQ:NWLI) P/E ratio to inform your assessment of the investment opportunity. National Western Life Group has a P/E ratio of 7.29, based on the last twelve months. In other words, at today's prices, investors are paying $7.29 for every $1 in prior year profit.
Check out our latest analysis for National Western Life Group
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for National Western Life Group:
P/E of 7.29 = $260.85 ÷ $35.78 (Based on the trailing twelve months to March 2019.)
Is A High P/E Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each $1 of company 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.
How Does National Western Life Group's P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. If you look at the image below, you can see National Western Life Group has a lower P/E than the average (17.5) in the insurance industry classification.
This suggests that market participants think National Western Life Group will underperform other companies in its industry. Many investors like to buy stocks when the market is pessimistic about their prospects. 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
P/E ratios primarily reflect market expectations around earnings growth rates. Earnings growth means that in the future the 'E' will be higher. That means even if the current P/E is high, it will reduce over time if the share price stays flat. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
It's great to see that National Western Life Group grew EPS by 14% in the last year. And its annual EPS growth rate over 5 years is 5.5%. This could arguably justify a relatively high P/E ratio.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
Don't forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. 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.
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
National Western Life Group's Balance Sheet
The extra options and safety that comes with National Western Life Group's US$92m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.
The Verdict On National Western Life Group's P/E Ratio
National Western Life Group's P/E is 7.3 which is below average (18.1) in the US market. The net cash position gives plenty of options to the business, and the recent improvement in EPS is good to see. The below average P/E ratio suggests that market participants don't believe the strong growth will continue.
Investors should be looking to buy stocks that the market is wrong about. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. Although we don't have analyst forecasts, you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.
Of course you might be able to find a better stock than National Western Life Group. So you may wish to see this free collection of other companies that have grown earnings strongly.
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.
