This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll show how you can use PICC Property and Casualty Company Limited’s (HKG:2328) P/E ratio to inform your assessment of the investment opportunity. PICC Property and Casualty has a price to earnings ratio of 8.07, based on the last twelve months. That is equivalent to an earnings yield of about 12%.

View our latest analysis for PICC Property and Casualty

How Do You Calculate PICC Property and Casualty’s P/E Ratio?

The formula for P/E is:

Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)

Or for PICC Property and Casualty:

P/E of 8.07 = CN¥7.19 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.89 (Based on the trailing twelve months to June 2018.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each HK$1 of company 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

If earnings fall then in the future the ‘E’ will be lower. 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.

PICC Property and Casualty had pretty flat EPS growth in the last year. But EPS is up 10% over the last 5 years. And over the longer term (3 years) earnings per share have decreased 3.0% annually. So it would be surprising to see a high P/E.

How Does PICC Property and Casualty’s P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that PICC Property and Casualty has a lower P/E than the average (12) P/E for companies in the insurance industry.

This suggests that market participants think PICC Property and Casualty will underperform other companies in its industry. Since the market seems unimpressed with PICC Property and Casualty, it’s quite possible it could surprise on the upside. 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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.