Kinsale Capital Group (NASDAQ:KNSL) shares have had a really impressive month, gaining 32%, after some slippage. Looking back a bit further, we're also happy to report the stock is up 64% in the last year.
Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. In the long term, share prices tend to follow earnings per share, but in the short term prices bounce around in response to short term factors (which are not always obvious). 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.
Does Kinsale Capital Group Have A Relatively High Or Low P/E For Its Industry?
Kinsale Capital Group's P/E of 38.76 indicates some degree of optimism towards the stock. The image below shows that Kinsale Capital Group has a significantly higher P/E than the average (9.4) P/E for companies in the insurance industry.
Its relatively high P/E ratio indicates that Kinsale Capital Group shareholders think it will perform better than other companies in its industry classification. Clearly the market expects growth, but it isn't guaranteed. So further research is always essential. I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. 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.
In the last year, Kinsale Capital Group grew EPS like Taylor Swift grew her fan base back in 2010; the 84% gain was both fast and well deserved. The sweetener is that the annual five year growth rate of 28% is also impressive. So I'd be surprised if the P/E ratio was not above average.
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. 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.
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.
So What Does Kinsale Capital Group's Balance Sheet Tell Us?
The extra options and safety that comes with Kinsale Capital Group's US$84m 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 Kinsale Capital Group's P/E Ratio
Kinsale Capital Group has a P/E of 38.8. That's higher than the average in its market, which is 13.6. Its net cash position is the cherry on top of its superb EPS growth. To us, this is the sort of company that we would expect to carry an above average price tag (relative to earnings). 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 29.4 back then to 38.8 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 visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.
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