Blog 65: Price Earnings Ratio by Xavier Lo, FIA, FRM, MBA

Do you ever hear bankers talking about the P.E. ratio? P.E. ratio this, P.E. ratio that. No? Well, me neither, but the P.E. ratio is actually quite an important ratio [指標] to know. What does it stand for? It’s the Price Earnings ratio [市盈率]!

The Price Earnings ratio is actually a metric to look at a company’s value [公司價值] by seeing how much its share price [股價] is compared to its earnings per share [每股收入]. In a very simple kind of way, say you were holding one share of a company. The earnings per share would mean how much money you can get from the company’s profits (if they paid all the earnings to shareholders). The share price is how much money it takes for you to buy that one share. If you have a high P.E. ratio, it means you paid more for the company’s share than how much it could earn for you. This could mean that the company’s share price is overvalued [被高估], or it could mean that there is a high potential for growth [高增長潛力] in the future.

By itself, the number does not really mean much. So how can you use it in a meaningful way? Well, if you focus on one company, you can look at its P.E. ratio over time to see whether it has increased or decreased over time in order to decide on your action. Another way is to compare this ratio across companies within the same industry [行業]. You might be able to see certain companies being over or under valued. Is it useful to compare across industries? Perhaps, but what you’ll find is that certain industries have high P.E. ratios by definition, like the technology sector [科技行業], and some industries have lower ratios, like utility [公用事業機構] or supermarket companies [超級市場].

While today’s blog isn’t about the insurance industry specifically, you may be involved in making investment decisions for your insurance company, so knowing this ratio helps. Or maybe you could even use this to make a bit of money for yourself!

Qualified fellow actuary (in UK and Hong Kong), Financial Risk Manager, and MBA graduate (listed on the Dean's List) with a passion for insurance, data science, and analytics. Experienced in a broad range of insurance roles (pricing, capital modelling, reserving, ERM), along with a touch of knowledge in banking. Member of the General Insurance Committee (2021), Actuarial Innovation Committee (2019 - 2021) in ASHK.

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