Yahoo Finance A Sliding Share Price Has Us Looking At Münchener Rückversicherungs-Gesellschaft Aktiengesellschaft's (ETR:MUV2) P/E Ratio
To the annoyance of some shareholders, Münchener Rückversicherungs-Gesellschaft (ETR:MUV2) shares are down a considerable 38% in the last month. Even longer term holders have taken a real hit with the stock declining 19% in the last year.
Assuming nothing else has changed, a lower share price makes a stock more attractive to potential buyers. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. The implication here is that long term investors have an opportunity when expectations of a company are too low. Perhaps the simplest way to get a read on investors' expectations of a business is to look at its Price to Earnings Ratio (PE Ratio). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.
See our latest analysis for Münchener Rückversicherungs-Gesellschaft
How Does Münchener Rückversicherungs-Gesellschaft's P/E Ratio Compare To Its Peers?
Münchener Rückversicherungs-Gesellschaft has a P/E ratio of 9.01. You can see in the image below that the average P/E (9.0) for companies in the insurance industry is roughly the same as Münchener Rückversicherungs-Gesellschaft's P/E.
Its P/E ratio suggests that Münchener Rückversicherungs-Gesellschaft shareholders think that in the future it will perform about the same as other companies in its industry classification. So if Münchener Rückversicherungs-Gesellschaft actually outperforms its peers going forward, that should be a positive for the share price. Further research into factors such as insider buying and selling, could help you form your own view on whether that is likely.
How Growth Rates Impact P/E Ratios
Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. 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.
Most would be impressed by Münchener Rückversicherungs-Gesellschaft earnings growth of 22% in the last year. And its annual EPS growth rate over 3 years is 5.6%. With that performance, you might expect an above average P/E ratio.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. So it won't reflect the advantage of cash, or disadvantage of debt. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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.
Münchener Rückversicherungs-Gesellschaft's Balance Sheet
Münchener Rückversicherungs-Gesellschaft has net cash of €3.7b. This is fairly high at 13% 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 Münchener Rückversicherungs-Gesellschaft's P/E Ratio
Münchener Rückversicherungs-Gesellschaft's P/E is 9.0 which is below average (16.8) in the DE market. The net cash position gives plenty of options to the business, and the recent improvement in EPS is good to see. The relatively low P/E ratio implies the market is pessimistic. What can be absolutely certain is that the market has become more pessimistic about Münchener Rückversicherungs-Gesellschaft over the last month, with the P/E ratio falling from 14.6 back then to 9.0 today. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for deep value investors this stock might justify some research.
Investors have an opportunity when market expectations about a stock are wrong. 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.
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.
