Improved Earnings Required Before MS&AD Insurance Group Holdings, Inc. (TSE:8725) Stock's 26% Jump Looks Justified

MS&AD Insurance Group Holdings, Inc. (TSE:8725) shares have had a really impressive month, gaining 26% after a shaky period beforehand. Taking a wider view, although not as strong as the last month, the full year gain of 17% is also fairly reasonable.

In spite of the firm bounce in price, MS&AD Insurance Group Holdings may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 6.9x, since almost half of all companies in Japan have P/E ratios greater than 13x and even P/E's higher than 21x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

We've discovered 2 warning signs about MS&AD Insurance Group Holdings. View them for free.

MS&AD Insurance Group Holdings certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for MS&AD Insurance Group Holdings

If you'd like to see what analysts are forecasting going forward, you should check out our free report on MS&AD Insurance Group Holdings.

Does Growth Match The Low P/E?

There's an inherent assumption that a company should underperform the market for P/E ratios like MS&AD Insurance Group Holdings' to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 104% last year. The latest three year period has also seen an excellent 297% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 2.0% each year during the coming three years according to the nine analysts following the company. With the market predicted to deliver 9.8% growth each year, the company is positioned for a weaker earnings result.

In light of this, it's understandable that MS&AD Insurance Group Holdings' P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Final Word

The latest share price surge wasn't enough to lift MS&AD Insurance Group Holdings' P/E close to the market median. 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 MS&AD Insurance Group Holdings' analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

Plus, you should also learn about these 2 warning signs we've spotted with MS&AD Insurance Group Holdings (including 1 which doesn't sit too well with us).

If these risks are making you reconsider your opinion on MS&AD Insurance Group Holdings, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.