Why We're Not Concerned About Legal & General Group Plc's (LON:LGEN) Share Price

Legal & General Group Plc's (LON:LGEN) price-to-earnings (or "P/E") ratio of 52x might make it look like a strong sell right now compared to the market in the United Kingdom, where around half of the companies have P/E ratios below 16x and even P/E's below 10x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

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With earnings growth that's superior to most other companies of late, Legal & General Group has been doing relatively well. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Legal & General Group

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

How Is Legal & General Group's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as steep as Legal & General Group's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered a decent 10% gain to the company's bottom line. Still, lamentably EPS has fallen 82% in aggregate from three years ago, which is disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 83% per annum as estimated by the six analysts watching the company. That's shaping up to be materially higher than the 15% per year growth forecast for the broader market.

With this information, we can see why Legal & General Group is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Legal & General Group's P/E

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Legal & General Group's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

You always need to take note of risks, for example - Legal & General Group has 2 warning signs we think you should be aware of.

If you're unsure about the strength of Legal & General Group's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.