Yahoo Finance Despite Its High P/E Ratio, Is Personal Group Holdings Plc (LON:PGH) Still Undervalued?
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Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll show how you can use Personal Group Holdings Plc's (LON:PGH) P/E ratio to inform your assessment of the investment opportunity. Personal Group Holdings has a P/E ratio of 17.36, based on the last twelve months. That is equivalent to an earnings yield of about 5.8%.
See our latest analysis for Personal Group Holdings
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Personal Group Holdings:
P/E of 17.36 = £4.73 ÷ £0.27 (Based on the trailing twelve months to December 2018.)
Is A High Price-to-Earnings Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the 'E' will be lower. That means unless the share price falls, the P/E will increase in a few years. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
Personal Group Holdings saw earnings per share improve by -4.4% last year. And it has bolstered its earnings per share by 31% per year over the last five years. In contrast, EPS has decreased by 14%, annually, over 3 years.
Does Personal Group Holdings Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company. You can see in the image below that the average P/E (16.5) for companies in the insurance industry is roughly the same as Personal Group Holdings's P/E.
Personal Group Holdings's P/E tells us that market participants think its prospects are roughly in line with its industry. The company could surprise by performing better than average, in the future. Further research into factors such asmanagement tenure, could help you form your own view on whether that is likely.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
The 'Price' in P/E reflects the market capitalization of the company. In other words, it does not consider any debt or cash that the company may have on the balance sheet. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.
While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.
Personal Group Holdings's Balance Sheet
Personal Group Holdings has net cash of UK£18m. This is fairly high at 12% of its market capitalization. That might mean balance sheet strength is important to the business, but should also help push the P/E a bit higher than it would otherwise be.
The Bottom Line On Personal Group Holdings's P/E Ratio
Personal Group Holdings has a P/E of 17.4. That's around the same as the average in the GB market, which is 16.2. Recent earnings growth wasn't bad. And the net cash position gives the company many options. The average P/E suggests the market isn't overly optimistic, though.
Investors should be looking to buy stocks that the market is wrong about. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine.' So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
You might be able to find a better buy than Personal Group Holdings. 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).
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
