Cincinnati Financial Corporation's (NASDAQ:CINF) Share Price Is Matching Sentiment Around Its Earnings

Cincinnati Financial Corporation's (NASDAQ:CINF) price-to-earnings (or "P/E") ratio of 13.3x might make it look like a buy right now compared to the market in the United States, where around half of the companies have P/E ratios above 20x and even P/E's above 34x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

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While the market has experienced earnings growth lately, Cincinnati Financial's earnings have gone into reverse gear, which is not great. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

See our latest analysis for Cincinnati Financial

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

Is There Any Growth For Cincinnati Financial?

There's an inherent assumption that a company should underperform the market for P/E ratios like Cincinnati Financial's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 15% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 246% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 9.1% per year as estimated by the seven analysts watching the company. Meanwhile, the broader market is forecast to expand by 11% per annum, which paints a poor picture.

In light of this, it's understandable that Cincinnati Financial's P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

What We Can Learn From Cincinnati Financial's P/E?

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Cincinnati Financial maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

You always need to take note of risks, for example - Cincinnati Financial has 1 warning sign we think you should be aware of.

Of course, you might also be able to find a better stock than Cincinnati Financial. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.