Why Investors Shouldn't Be Surprised By Hannover Rück SE's (ETR:HNR1) Low P/E

Hannover Rück SE's (ETR:HNR1) price-to-earnings (or "P/E") ratio of 13.5x might make it look like a buy right now compared to the market in Germany, where around half of the companies have P/E ratios above 16x and even P/E's above 29x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

With earnings growth that's superior to most other companies of late, Hannover Rück has been doing relatively well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

View our latest analysis for Hannover Rück

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Hannover Rück.

How Is Hannover Rück's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as low as Hannover Rück's is when the company's growth is on track to lag the market.

Retrospectively, the last year delivered an exceptional 112% gain to the company's bottom line. Pleasingly, EPS has also lifted 110% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the twelve analysts covering the company suggest earnings should grow by 6.4% each year over the next three years. Meanwhile, the rest of the market is forecast to expand by 16% per annum, which is noticeably more attractive.

With this information, we can see why Hannover Rück is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Key Takeaway

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Hannover Rück's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for Hannover Rück with six simple checks will allow you to discover any risks that could be an issue.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.