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The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll show how you can use ICICI Prudential Life Insurance Company Limited’s (NSE:ICICIPRULI) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, ICICI Prudential Life Insurance’s P/E ratio is 28.7. That is equivalent to an earnings yield of about 3.5%.
How Do You Calculate ICICI Prudential Life Insurance’s P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for ICICI Prudential Life Insurance:
P/E of 28.7 = ₹298.4 ÷ ₹10.4 (Based on the year to December 2018.)
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. That isn’t a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business’s prospects, relative to stocks with a lower P/E.
How Growth Rates Impact P/E Ratios
Companies that shrink earnings per share quickly will rapidly decrease the ‘E’ in the equation. That means even if the current P/E is low, it will increase over time if the share price stays flat. A higher P/E should indicate the stock is expensive relative to others — and that may encourage shareholders to sell.
ICICI Prudential Life Insurance shrunk earnings per share by 8.4% last year. But EPS is up 1.1% over the last 5 years. And EPS is down 2.4% a year, over the last 3 years. So you wouldn’t expect a very high P/E.
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. If you look at the image below, you can see ICICI Prudential Life Insurance has a lower P/E than the average (31.2) in the insurance industry classification.
Its relatively low P/E ratio indicates that ICICI Prudential Life Insurance shareholders think it will struggle to do as well as other companies in its industry classification. Many investors like to buy stocks when the market is pessimistic about their prospects. You should delve deeper. I like to check if company insiders have been buying or selling.
Remember: P/E Ratios Don’t Consider The Balance Sheet
Don’t forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
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 ₹2.4b 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
ICICI Prudential Life Insurance trades on a P/E ratio of 28.7, which is above the IN market average of 15.6. The recent drop in earnings per share might keep value investors away, but the net cash position means the company has time to improve: and the high P/E suggests the market thinks 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.
You might be able to find a better buy than ICICI Prudential Life Insurance. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.