Yahoo Finance Here's What Münchener Rückversicherungs-Gesellschaft Aktiengesellschaft's (ETR:MUV2) P/E Is Telling Us
Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll apply a basic P/E ratio analysis to Münchener Rückversicherungs-Gesellschaft Aktiengesellschaft's (ETR:MUV2), to help you decide if the stock is worth further research. Münchener Rückversicherungs-Gesellschaft has a P/E ratio of 14.56, based on the last twelve months. In other words, at today's prices, investors are paying €14.56 for every €1 in prior year profit.
Check out our latest analysis for Münchener Rückversicherungs-Gesellschaft
How Do I Calculate Münchener Rückversicherungs-Gesellschaft's Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Münchener Rückversicherungs-Gesellschaft:
P/E of 14.56 = EUR277.80 ÷ EUR19.08 (Based on the trailing twelve months to September 2019.)
Is A High P/E Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
Does Münchener Rückversicherungs-Gesellschaft Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company. The image below shows that Münchener Rückversicherungs-Gesellschaft has a higher P/E than the average (12.5) P/E for companies in the insurance industry.
That means that the market expects Münchener Rückversicherungs-Gesellschaft will outperform other companies in its industry. Clearly the market expects growth, but it isn't guaranteed. So investors should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means even if the current P/E is high, it will reduce over time if the share price stays flat. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Münchener Rückversicherungs-Gesellschaft increased earnings per share by an impressive 11% over the last twelve months. And earnings per share have improved by 3.1% annually, over the last three years. This could arguably justify a relatively high P/E ratio. In contrast, EPS has decreased by 1.6%, annually, over 5 years.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).
How Does Münchener Rückversicherungs-Gesellschaft's Debt Impact Its P/E Ratio?
Since Münchener Rückversicherungs-Gesellschaft holds net cash of €1.3b, it can spend on growth, justifying a higher P/E ratio than otherwise.
The Bottom Line On Münchener Rückversicherungs-Gesellschaft's P/E Ratio
Münchener Rückversicherungs-Gesellschaft's P/E is 14.6 which is below average (20.8) in the DE market. 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 the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. So this free report on the analyst consensus forecasts could help you make a master move on this stock.
You might be able to find a better buy than Münchener Rückversicherungs-Gesellschaft. 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).
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.
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. Thank you for reading.
