There wouldn't be many who think Ping An Insurance (Group) Company of China, Ltd.'s (HKG:2318) price-to-earnings (or "P/E") ratio of 7.2x is worth a mention when the median P/E in Hong Kong is similar at about 9x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.
Recent times haven't been advantageous for Ping An Insurance (Group) Company of China as its earnings have been falling quicker than most other companies. One possibility is that the P/E is moderate because investors think the company's earnings trend will eventually fall in line with most others in the market. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. If not, then existing shareholders may be a little nervous about the viability of the share price.
View our latest analysis for Ping An Insurance (Group) Company of China
Does Growth Match The P/E?
In order to justify its P/E ratio, Ping An Insurance (Group) Company of China would need to produce growth that's similar to the market.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 31%. The last three years don't look nice either as the company has shrunk EPS by 37% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 35% per year over the next three years. That's shaping up to be materially higher than the 15% per annum growth forecast for the broader market.
In light of this, it's curious that Ping An Insurance (Group) Company of China's P/E sits in line with the majority of other companies. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.
The Final Word
Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
We've established that Ping An Insurance (Group) Company of China currently trades on a lower than expected P/E since its forecast growth is higher than the wider market. There could be some unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. It appears some are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.
Before you settle on your opinion, we've discovered 2 warning signs for Ping An Insurance (Group) Company of China that you should be aware of.
Of course, you might also be able to find a better stock than Ping An Insurance (Group) Company of China. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.