This article is written for those who want to get better at using price to earnings ratios (P/E ratios). To keep it practical, we'll show how The People's Insurance Company (Group) of China Limited's (HKG:1339) P/E ratio could help you assess the value on offer. What is People's Insurance Company (Group) of China's P/E ratio? Well, based on the last twelve months it is 4.62. That corresponds to an earnings yield of approximately 21.6%.
How Do I Calculate People's Insurance Company (Group) of China's Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share (in the reporting currency) ÷ Earnings per Share (EPS)
Or for People's Insurance Company (Group) of China:
P/E of 4.62 = CN¥2.314 ÷ CN¥0.501 (Based on the trailing twelve months to December 2019.)
(Note: the above calculation uses the share price in the reporting currency, namely CNY and the calculation results may not be precise due to rounding.)
Is A High Price-to-Earnings Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. That isn't necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
How Does People's Insurance Company (Group) of China's P/E Ratio Compare To Its Peers?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. We can see in the image below that the average P/E (6.7) for companies in the insurance industry is higher than People's Insurance Company (Group) of China's P/E.
People's Insurance Company (Group) of China's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Many investors like to buy stocks when the market is pessimistic about their prospects. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
How Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. 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. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
People's Insurance Company (Group) of China's earnings made like a rocket, taking off 65% last year. Having said that, if we look back three years, EPS growth has averaged a comparatively less impressive 14%.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).
People's Insurance Company (Group) of China's Balance Sheet
People's Insurance Company (Group) of China has net debt equal to 29% of its market cap. You'd want to be aware of this fact, but it doesn't bother us.
The Verdict On People's Insurance Company (Group) of China's P/E Ratio
People's Insurance Company (Group) of China has a P/E of 4.6. That's below the average in the HK market, which is 9.1. The EPS growth last year was strong, and debt levels are quite reasonable. If the company can continue to grow earnings, then the current P/E may be unjustifiably low.
Investors have an opportunity when market expectations about a stock are wrong. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free report on the analyst consensus forecasts could help you make a master move on this stock.
But note: People's Insurance Company (Group) of China 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 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.
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.