Should You Be Tempted To Sell ICICI Prudential Life Insurance Company Limited (NSE:ICICIPRULI) Because Of Its P/E Ratio?

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 ICICI Prudential Life Insurance Company Limited's (NSE:ICICIPRULI) P/E ratio could help you assess the value on offer. ICICI Prudential Life Insurance has a P/E ratio of 58.80, based on the last twelve months. That means that at current prices, buyers pay ₹58.80 for every ₹1 in trailing yearly profits.

Check out our latest analysis for ICICI Prudential Life Insurance

How Do You Calculate ICICI Prudential Life Insurance's P/E Ratio?

The formula for P/E is:

Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)

Or for ICICI Prudential Life Insurance:

P/E of 58.80 = INR470.60 ÷ INR8.00 (Based on the year to December 2019.)

Is A High P/E Ratio Good?

The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.

How Does ICICI Prudential Life Insurance's P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. You can see in the image below that the average P/E (49.9) for companies in the insurance industry is lower than ICICI Prudential Life Insurance's P/E.

Its relatively high P/E ratio indicates that ICICI Prudential Life Insurance shareholders think it will perform better than other companies in its industry classification. The market is optimistic about the future, but that doesn't guarantee future growth. So investors should delve deeper. I like to check if company insiders have been buying or selling.

How Growth Rates Impact P/E Ratios

When earnings fall, the 'E' decreases, over time. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. Then, a higher P/E might scare off shareholders, pushing the share price down.

ICICI Prudential Life Insurance shrunk earnings per share by 5.7% last year. And over the longer term (5 years) earnings per share have decreased 6.8% annually. So you wouldn't expect a very high P/E.

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. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.

Is Debt Impacting ICICI Prudential Life Insurance's P/E?

The extra options and safety that comes with ICICI Prudential Life Insurance's ₹16b 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 ICICI Prudential Life Insurance's P/E Ratio

With a P/E ratio of 58.8, ICICI Prudential Life Insurance is expected to grow earnings very strongly in the years to come. The recent drop in earnings per share would make some investors cautious, but the relatively strong balance sheet will allow the company time to invest in growth. Clearly, the high P/E indicates shareholders think it will!

When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

Of course you might be able to find a better stock than ICICI Prudential Life Insurance. So you may wish to see this free collection of other companies that have grown earnings strongly.

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.