Yahoo Finance Does Zurich Insurance Group AG (VTX:ZURN) Have A Good P/E Ratio?
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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 Zurich Insurance Group AG's (VTX:ZURN) P/E ratio to inform your assessment of the investment opportunity. What is Zurich Insurance Group's P/E ratio? Well, based on the last twelve months it is 12.88. That means that at current prices, buyers pay CHF12.88 for every CHF1 in trailing yearly profits.
Check out our latest analysis for Zurich Insurance Group
How Do You Calculate Zurich Insurance Group's P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)
Or for Zurich Insurance Group:
P/E of 12.88 = $323.22 (Note: this is the share price in the reporting currency, namely, USD ) ÷ $25.1 (Based on the trailing twelve months to December 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. That isn't necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. That means unless the share price increases, the P/E will reduce in a few years. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Zurich Insurance Group increased earnings per share by a whopping 25% last year. And it has improved its earnings per share by 27% per year over the last three years. With that performance, I would expect it to have an above average P/E ratio. But earnings per share are down 1.7% per year over the last five years.
Does Zurich Insurance Group Have A Relatively High Or Low P/E For Its Industry?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. If you look at the image below, you can see Zurich Insurance Group has a lower P/E than the average (14.4) in the insurance industry classification.
Zurich Insurance Group's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Many investors like to buy stocks when the market is pessimistic about their prospects. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
Remember: P/E Ratios Don't Consider The Balance Sheet
Don't forget that the P/E ratio considers market capitalization. In other words, it does not consider any debt or cash that the company may have on the balance sheet. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.
Zurich Insurance Group's Balance Sheet
The extra options and safety that comes with Zurich Insurance Group's US$3.4b 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 Zurich Insurance Group's P/E Ratio
Zurich Insurance Group has a P/E of 12.9. That's below the average in the CH market, which is 17.9. Not only should the net cash position reduce risk, but the recent growth has been impressive. The relatively low P/E ratio implies the market is pessimistic.
Investors should be looking to buy stocks that the market is wrong about. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free report on the analyst consensus forecasts could help you make a master move on this stock.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
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.
