Unfortunately for some shareholders, the European Reliance General Insurance (ATH:EUPIC) share price has dived 33% in the last thirty days. Even longer term holders have taken a real hit with the stock declining 8.1% in the last year.
All else being equal, a share price drop should make a stock more attractive to potential investors. 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.
View our latest analysis for European Reliance General Insurance
Does European Reliance General Insurance Have A Relatively High Or Low P/E For Its Industry?
European Reliance General Insurance's P/E of 5.35 indicates relatively low sentiment towards the stock. The image below shows that European Reliance General Insurance has a lower P/E than the average (9.0) P/E for companies in the insurance industry.
This suggests that market participants think European Reliance General Insurance will underperform other companies in its industry. Since the market seems unimpressed with European Reliance General Insurance, 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.
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. When earnings grow, the 'E' increases, over time. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
European Reliance General Insurance saw earnings per share improve by -2.2% last year. And its annual EPS growth rate over 5 years is 11%.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. Thus, the metric does not reflect cash or debt held by the company. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.