With Aviva plc (LON:AV.) It Looks Like You'll Get What You Pay For

Aviva plc's (LON:AV.) price-to-earnings (or "P/E") ratio of 22.1x might make it look like a sell right now compared to the market in the United Kingdom, where around half of the companies have P/E ratios below 15x and even P/E's below 8x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

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Aviva could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

See our latest analysis for Aviva

Keen to find out how analysts think Aviva's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Growth For Aviva?

There's an inherent assumption that a company should outperform the market for P/E ratios like Aviva's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 37% decrease to the company's bottom line. Even so, admirably EPS has lifted 182% in aggregate from three years ago, notwithstanding the last 12 months. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Turning to the outlook, the next three years should generate growth of 37% per year as estimated by the five analysts watching the company. That's shaping up to be materially higher than the 15% each year growth forecast for the broader market.

In light of this, it's understandable that Aviva's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From Aviva's P/E?

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.

As we suspected, our examination of Aviva's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

Having said that, be aware Aviva is showing 2 warning signs in our investment analysis, you should know about.

If these risks are making you reconsider your opinion on Aviva, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.