Yahoo Finance Here's What ICC Holdings, Inc.'s (NASDAQ:ICCH) P/E Ratio Is Telling Us
Unfortunately for some shareholders, the ICC Holdings (NASDAQ:ICCH) share price has dived in the last thirty days. The recent drop has obliterated the annual return, with the share price now down 2.4% over that longer period. On the bright side, the share price is slightly up over the last 90 days.
Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. In the long term, share prices tend to follow earnings per share, but in the short term prices bounce around in response to short term factors (which are not always obvious). The implication here is that deep value investors might steer clear when expectations of a company are too high. 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.
Check out our latest analysis for ICC Holdings
How Does ICC Holdings's P/E Ratio Compare To Its Peers?
ICC Holdings's P/E of 30.32 indicates some degree of optimism towards the stock. You can see in the image below that the average P/E (17.0) for companies in the insurance industry is lower than ICC Holdings's P/E.
Its relatively high P/E ratio indicates that ICC Holdings shareholders think it will perform better than other companies in its industry classification. Clearly the market expects growth, but it isn't guaranteed. So investors should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
When earnings fall, the 'E' decreases, over time. That means even if the current P/E is low, it will increase over time if the share price stays flat. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
ICC Holdings's earnings made like a rocket, taking off 103% last year. Regrettably, the longer term performance is poor, with EPS down per year over 3 years.
Remember: P/E Ratios Don't Consider The Balance Sheet
Don't forget that the P/E ratio considers market capitalization. So it won't reflect the advantage of cash, or disadvantage of debt. 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).
While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.
ICC Holdings's Balance Sheet
ICC Holdings has net debt worth just 3.6% of its market capitalization. It would probably trade on a higher P/E ratio if it had a lot of cash, but I doubt it is having a big impact.
The Verdict On ICC Holdings's P/E Ratio
ICC Holdings trades on a P/E ratio of 30.3, which is above its market average of 18.8. While the company does use modest debt, its recent earnings growth is superb. So on this analysis a high P/E ratio seems reasonable. What can be absolutely certain is that the market has become less optimistic about ICC Holdings over the last month, with the P/E ratio falling from 30.3 back then to 30.3 today. For those who don't like to trade against momentum, that could be a warning sign, but a contrarian investor might want to take a closer look.
Investors should be looking to buy stocks that the market is wrong about. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine. We don't have analyst forecasts, but you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.
But note: ICC 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).
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.
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