Subdued Growth No Barrier To Insurance Australia Group Limited's (ASX:IAG) Price

With a median price-to-earnings (or "P/E") ratio of close to 18x in Australia, you could be forgiven for feeling indifferent about Insurance Australia Group Limited's (ASX:IAG) P/E ratio of 16.6x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

We've found 21 US stocks that are forecast to pay a dividend yield of over 6% next year. See the full list for free.

With earnings growth that's superior to most other companies of late, Insurance Australia Group has been doing relatively well. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

See our latest analysis for Insurance Australia Group

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Insurance Australia Group.

Does Growth Match The P/E?

Insurance Australia Group's P/E ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the market.

Retrospectively, the last year delivered an exceptional 75% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 518% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the eleven analysts covering the company suggest earnings growth is heading into negative territory, declining 3.6% per year over the next three years. Meanwhile, the broader market is forecast to expand by 15% per year, which paints a poor picture.

In light of this, it's somewhat alarming that Insurance Australia Group's P/E sits in line with the majority of other companies. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock right now. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the negative growth outlook.

The Bottom Line On Insurance Australia Group's P/E

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Insurance Australia Group currently trades on a higher than expected P/E for a company whose earnings are forecast to decline. When we see a poor outlook with earnings heading backwards, we suspect share price is at risk of declining, sending the moderate P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Plus, you should also learn about these 2 warning signs we've spotted with Insurance Australia Group (including 1 which is concerning).

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.