Yahoo Finance Why Münchener Rückversicherungs-Gesellschaft Aktiengesellschaft's (FRA:MUV2) High P/E Ratio Isn't Necessarily A Bad Thing
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This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). To keep it practical, we'll show how Münchener Rückversicherungs-Gesellschaft Aktiengesellschaft's (FRA:MUV2) P/E ratio could help you assess the value on offer. Looking at earnings over the last twelve months, Münchener Rückversicherungs-Gesellschaft has a P/E ratio of 15.54. That is equivalent to an earnings yield of about 6.4%.
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 15.54 = €223.1 ÷ €14.35 (Based on the year to March 2019.)
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 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
When earnings fall, the 'E' decreases, over time. That means even if the current P/E is low, it will increase over time if the share price stays flat. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.
Münchener Rückversicherungs-Gesellschaft's earnings made like a rocket, taking off 239% last year. Unfortunately, earnings per share are down 4.8% a year, over 5 years.
Does Münchener Rückversicherungs-Gesellschaft Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that Münchener Rückversicherungs-Gesellschaft has a higher P/E than the average (13.3) P/E for companies in the insurance industry.
Its relatively high P/E ratio indicates that Münchener Rückversicherungs-Gesellschaft shareholders think it will perform better than other companies in its industry classification. Clearly the market expects growth, but it isn't guaranteed. So further research is always essential. 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. Thus, the metric does not reflect cash or debt held by the company. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
How Does Münchener Rückversicherungs-Gesellschaft's Debt Impact Its P/E Ratio?
Münchener Rückversicherungs-Gesellschaft has net cash of €1.4b. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.
The Verdict On Münchener Rückversicherungs-Gesellschaft's P/E Ratio
Münchener Rückversicherungs-Gesellschaft's P/E is 15.5 which is below average (20.3) 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 below average P/E ratio suggests that market participants don't believe the strong growth will continue. Given analysts are expecting further growth, one I would have expected a higher P/E ratio. So this stock may well be worth further research.
When the market is wrong about a stock, it gives savvy investors an opportunity. 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 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).
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.
