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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 United Overseas Insurance Limited’s (SGX:U13) P/E ratio could help you assess the value on offer. United Overseas Insurance has a P/E ratio of 13.76, based on the last twelve months. That means that at current prices, buyers pay SGD13.76 for every SGD1 in trailing yearly profits.
Check out our latest analysis for United Overseas Insurance
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for United Overseas Insurance:
P/E of 13.76 = SGD6.7 ÷ SGD0.49 (Based on the trailing twelve months to September 2018.)
Is A High P/E Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each SGD1 the company has earned over the last year. 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
P/E ratios primarily reflect market expectations around earnings growth rates. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. That means even if the current P/E is high, it will reduce over time if the share price stays flat. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
United Overseas Insurance increased earnings per share by 7.3% last year. And it has improved its earnings per share by 17% per year over the last three years.
How Does United Overseas Insurance’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. We can see in the image below that the average P/E (15.5) for companies in the insurance industry is higher than United Overseas Insurance’s P/E.
This suggests that market participants think United Overseas Insurance will underperform other companies in its industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
Don’t forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.