Today, we’ll introduce the concept of the P/E ratio for those who are learning about investing. To keep it practical, we’ll show how Ping An Insurance (Group) Company of China, Ltd.’s (HKG:2318) P/E ratio could help you assess the value on offer. Looking at earnings over the last twelve months, Ping An Insurance (Group) Company of China has a P/E ratio of 9.06. That is equivalent to an earnings yield of about 11.0%.
See our latest analysis for Ping An Insurance (Group) Company of China
How Do I Calculate Ping An Insurance (Group) Company of China’s Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)
Or for Ping An Insurance (Group) Company of China:
P/E of 9.06 = CNY80.33 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CNY8.86 (Based on the year to September 2019.)
Is A High P/E Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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’.
How Does Ping An Insurance (Group) Company of China’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. The image below shows that Ping An Insurance (Group) Company of China has a P/E ratio that is roughly in line with the insurance industry average (9.6).
That indicates that the market expects Ping An Insurance (Group) Company of China will perform roughly in line with other companies in its industry. So if Ping An Insurance (Group) Company of China actually outperforms its peers going forward, that should be a positive for the share price. Further research into factors such as insider buying and selling, could help you form your own view on whether that is likely.
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. 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. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
In the last year, Ping An Insurance (Group) Company of China grew EPS like Taylor Swift grew her fan base back in 2010; the 55% gain was both fast and well deserved. The sweetener is that the annual five year growth rate of 31% is also impressive. With that kind of growth rate we would generally expect a high P/E ratio.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
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.
Ping An Insurance (Group) Company of China’s Balance Sheet
With net cash of CN¥364b, Ping An Insurance (Group) Company of China has a very strong balance sheet, which may be important for its business. Having said that, at 23% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.
The Verdict On Ping An Insurance (Group) Company of China’s P/E Ratio
Ping An Insurance (Group) Company of China’s P/E is 9.1 which is below average (10.0) in the HK market. Not only should the net cash position reduce risk, but the recent growth has been impressive. The relatively low P/E ratio implies the market is pessimistic.
When the market is wrong about a stock, it gives savvy investors an opportunity. 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 visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.
But note: Ping An Insurance (Group) Company 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.