Does ICC Holdings Inc’s (NASDAQ:ICCH) PE Ratio Warrant A Sell?

I am writing today to help inform people who are new to the stock market and want to better understand how you can grow your money by investing in ICC Holdings Inc (NASDAQ:ICCH).

ICC Holdings Inc (NASDAQ:ICCH) trades with a trailing P/E of 90.6x, which is higher than the industry average of 14.3x. While this makes ICCH appear like a stock to avoid or sell if you own it, you might change your mind after I explain the assumptions behind the P/E ratio. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for. Check out our latest analysis for ICC Holdings

Breaking down the Price-Earnings ratio

NasdaqCM:ICCH PE PEG Gauge June 19th 18
NasdaqCM:ICCH PE PEG Gauge June 19th 18

P/E is a popular ratio used for relative valuation. By comparing a stock’s price per share to its earnings per share, we are able to see how much investors are paying for each dollar of the company’s earnings.

Formula

Price-Earnings Ratio = Price per share ÷ Earnings per share

P/E Calculation for ICCH

Price per share = $15.31

Earnings per share = $0.169

∴ Price-Earnings Ratio = $15.31 ÷ $0.169 = 90.6x

The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. Ultimately, our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to ICCH, such as company lifetime and products sold. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. Since it is expected that similar companies have similar P/E ratios, we can come to some conclusions about the stock if the ratios are different.

ICCH’s P/E of 90.6x is higher than its industry peers (14.3x), which implies that each dollar of ICCH’s earnings is being overvalued by investors. Therefore, according to this analysis, ICCH is an over-priced stock.

Assumptions to watch out for

However, before you rush out to sell your ICCH shares, it is important to note that this conclusion is based on two key assumptions. The first is that our “similar companies” are actually similar to ICCH. If the companies aren’t similar, the difference in P/E might be a result of other factors. For example, if you inadvertently compared riskier firms with ICCH, then investors would naturally value ICCH at a higher price since it is a less risky investment. Similarly, if you accidentally compared lower growth firms with ICCH, investors would also value ICCH at a higher price since it is a higher growth investment. Both scenarios would explain why ICCH has a higher P/E ratio than its peers. The second assumption that must hold true is that the stocks we are comparing ICCH to are fairly valued by the market. If this does not hold, there is a possibility that ICCH’s P/E is higher because firms in our peer group are being undervalued by the market.

NasdaqCM:ICCH Future Profit June 19th 18
NasdaqCM:ICCH Future Profit June 19th 18

What this means for you:

You may have already conducted fundamental analysis on the stock as a shareholder, so its current overvaluation could signal a potential selling opportunity to reduce your exposure to ICCH. Now that you understand the ins and outs of the PE metric, you should know to bear in mind its limitations before you make an investment decision. Remember that basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PE ratio is very one-dimensional. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:

  1. Financial Health: Is ICCH’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
  2. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.