A Sliding Share Price Has Us Looking At Kinsale Capital Group, Inc.'s (NASDAQ:KNSL) P/E Ratio
Unfortunately for some shareholders, the Kinsale Capital Group (NASDAQ:KNSL) share price has dived 34% in the last thirty days. Looking back over the last year, the stock has been a solid performer, with a gain of 23%.
All else being equal, a share price drop should make a stock more attractive to potential investors. 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. The implication here is that long term investors have an opportunity when expectations of a company are too low. 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.
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 28.67 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 (8.7) 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 investors should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. That means even if the current P/E is high, it will reduce over time if the share price stays flat. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
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 cherry on top is that the five year growth rate was an impressive 28% per year. With that kind of growth rate we would generally expect a high P/E ratio.
Remember: P/E Ratios Don't Consider The Balance Sheet
Don't forget that the P/E ratio considers market capitalization. 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.
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.
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's P/E is 28.7 which is above average (12.7) in its market. The excess cash it carries is the gravy on top its fast EPS growth. So based on this analysis we'd expect Kinsale Capital Group to have a high P/E ratio. What can be absolutely certain is that the market has become significantly less optimistic about Kinsale Capital Group over the last month, with the P/E ratio falling from 43.1 back then to 28.7 today. For those who don't like to trade against momentum, that could be a warning sign, but a contrarian investor might want to take a closer look.
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 visual report on analyst forecasts could hold the key to an excellent investment decision.
But note: Kinsale Capital Group may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
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.
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