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A Sliding Share Price Has Us Looking At Unipol Gruppo S.p.A.'s (BIT:UNI) P/E Ratio

Simply Wall St

To the annoyance of some shareholders, Unipol Gruppo (BIT:UNI) shares are down a considerable 34% in the last month. That drop has capped off a tough year for shareholders, with the share price down 33% in that time.

Assuming nothing else has changed, a lower share price makes a stock more 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, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. 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.

Check out our latest analysis for Unipol Gruppo

How Does Unipol Gruppo's P/E Ratio Compare To Its Peers?

Unipol Gruppo's P/E of 2.35 indicates relatively low sentiment towards the stock. If you look at the image below, you can see Unipol Gruppo has a lower P/E than the average (8.8) in the insurance industry classification.

BIT:UNI Price Estimation Relative to Market March 30th 2020

This suggests that market participants think Unipol Gruppo will underperform other companies in its industry. Since the market seems unimpressed with Unipol Gruppo, it's quite possible it could surprise on the upside. 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

Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. When earnings grow, the 'E' increases, over time. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

Notably, Unipol Gruppo grew EPS by a whopping 27% in the last year. And earnings per share have improved by 36% annually, over the last five years. With that performance, I would expect it to have an above average 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. 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.

Unipol Gruppo's Balance Sheet

Unipol Gruppo has net debt worth a very significant 151% of its market capitalization. This level of debt justifies a relatively low P/E, so remain cognizant of the debt, if you're comparing it to other stocks.

The Bottom Line On Unipol Gruppo's P/E Ratio

Unipol Gruppo has a P/E of 2.3. That's below the average in the IT market, which is 12.5. While the EPS growth last year was strong, the significant debt levels reduce the number of options available to management. The low P/E ratio suggests current market expectations are muted, implying these levels of growth will not continue. Given Unipol Gruppo's P/E ratio has declined from 3.6 to 2.3 in the last month, we know for sure that the market is more worried about the business today, than it was back then. For those who prefer invest in growth, this stock apparently offers limited promise, but the deep value investors may find the pessimism around this stock enticing.

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. 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 Unipol Gruppo. 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 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.