Unfortunately for some shareholders, the QBE Insurance Group (ASX:QBE) share price has dived 37% in the last thirty days. That drop has capped off a tough year for shareholders, with the share price down 31% in that time.
Assuming nothing else has changed, a lower share price makes a stock more attractive to potential buyers. In the long term, share prices tend to follow earnings per share, but in the short term prices bounce around in response to short term factors (which are not always obvious). So, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. Perhaps the simplest way to get a read on investors’ expectations of a business is to look at its Price to Earnings Ratio (PE Ratio). A high P/E implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.
See our latest analysis for QBE Insurance Group
Does QBE Insurance Group Have A Relatively High Or Low P/E For Its Industry?
We can tell from its P/E ratio of 12.17 that sentiment around QBE Insurance Group isn’t particularly high. If you look at the image below, you can see QBE Insurance Group has a lower P/E than the average (16.9) in the insurance industry classification.
QBE Insurance Group’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
When earnings fall, the ‘E’ decreases, over time. That means unless the share price falls, the P/E will increase in a few years. A higher P/E should indicate the stock is expensive relative to others — and that may encourage shareholders to sell.
QBE Insurance Group’s earnings per share grew by 3.0% in the last twelve months. But earnings per share are down 5.5% per year over the last five years.
Remember: P/E Ratios Don’t Consider The Balance Sheet
The ‘Price’ in P/E reflects the market capitalization of the company. So it won’t reflect the advantage of cash, or disadvantage of debt. 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).
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).
So What Does QBE Insurance Group’s Balance Sheet Tell Us?
Net debt is 25% of QBE Insurance Group’s market cap. While it’s worth keeping this in mind, it isn’t a worry.
The Verdict On QBE Insurance Group’s P/E Ratio
QBE Insurance Group’s P/E is 12.2 which is about average (12.6) in the AU market. With modest debt and some recent earnings growth, it seems likely the market expects a steady performance going forward. What can be absolutely certain is that the market has become significantly less optimistic about QBE Insurance Group over the last month, with the P/E ratio falling from 19.2 back then to 12.2 today. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for a contrarian, it may signal opportunity.
Investors should be looking to buy stocks that the market is wrong about. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. 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: QBE Insurance 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.
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.