Yahoo Finance Is James River Group Holdings, Ltd.'s (NASDAQ:JRVR) High P/E Ratio A Problem For Investors?
This article is written for those who want to get better at using price to earnings ratios (P/E ratios). To keep it practical, we'll show how James River Group Holdings, Ltd.'s (NASDAQ:JRVR) P/E ratio could help you assess the value on offer. James River Group Holdings has a P/E ratio of 19.95, based on the last twelve months. That is equivalent to an earnings yield of about 5.0%.
Check out our latest analysis for James River Group Holdings
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for James River Group Holdings:
P/E of 19.95 = $47.23 ÷ $2.37 (Based on the year to March 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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.
Does James River Group Holdings Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company. As you can see below, James River Group Holdings has a higher P/E than the average company (17.5) in the insurance industry.
That means that the market expects James River Group Holdings will outperform other companies in its industry. The market is optimistic about the future, but that doesn't guarantee future growth. So further research is always essential. I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. When earnings grow, the 'E' increases, over time. That means unless the share price increases, the P/E will reduce in a few years. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
James River Group Holdings's earnings made like a rocket, taking off 72% last year. Having said that, if we look back three years, EPS growth has averaged a comparatively less impressive 6.1%.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. That means it doesn't take debt or cash into account. 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).
Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).
James River Group Holdings's Balance Sheet
Since James River Group Holdings holds net cash of US$22m, it can spend on growth, justifying a higher P/E ratio than otherwise.
The Verdict On James River Group Holdings's P/E Ratio
James River Group Holdings has a P/E of 20. That's higher than the average in its market, which is 17.9. Its net cash position is the cherry on top of its superb EPS growth. So based on this analysis we'd expect James River Group Holdings to have a high P/E ratio.
Investors should be looking to buy stocks that the market is wrong about. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
But note: James River Group Holdings may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
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.
