The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at PICC Property and Casualty Company Limited's (HKG:2328) P/E ratio and reflect on what it tells us about the company's share price. Looking at earnings over the last twelve months, PICC Property and Casualty has a P/E ratio of 9.26. That means that at current prices, buyers pay HK$9.26 for every HK$1 in trailing yearly profits.
How Do You Calculate PICC Property and Casualty's P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)
Or for PICC Property and Casualty:
P/E of 9.26 = HK$8.42 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ HK$0.91 (Based on the trailing twelve months to June 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each HK$1 the company has earned over the last year. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.
Does PICC Property and Casualty Have A Relatively High Or Low P/E For Its Industry?
We can get an indication of market expectations by looking at the P/E ratio. You can see in the image below that the average P/E (9.8) for companies in the insurance industry is roughly the same as PICC Property and Casualty's P/E.
Its P/E ratio suggests that PICC Property and Casualty shareholders think that in the future it will perform about the same as other companies in its industry classification. If the company has better than average prospects, then the market might be underestimating it. I would further inform my view by checking insider buying and selling., among other things.
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. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. Then, a lower P/E should attract more buyers, pushing the share price up.
PICC Property and Casualty's earnings per share grew by -2.0% in the last twelve months. And earnings per share have improved by 12% annually, over the last five 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. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
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.
Is Debt Impacting PICC Property and Casualty's P/E?
The extra options and safety that comes with PICC Property and Casualty's CN¥14b 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 PICC Property and Casualty's P/E Ratio
PICC Property and Casualty trades on a P/E ratio of 9.3, which is below the HK market average of 10.2. Earnings improved over the last year. And the net cash position gives the company many options. So it's strange that the low P/E indicates low expectations. Given analysts are expecting further growth, one might have expected a higher P/E ratio. That may be worth further research.
Investors should be looking to buy stocks that the market is wrong about. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine. So this free report on the analyst consensus forecasts could help you make a master move on this stock.
You might be able to find a better buy than PICC Property and Casualty. 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.
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