How Does RSA Insurance Group's (LON:RSA) P/E Compare To Its Industry, After The Share Price Drop?

Unfortunately for some shareholders, the RSA Insurance Group (LON:RSA) share price has dived 43% in the last thirty days. Indeed the recent decline has arguably caused some bitterness for shareholders who have held through the 35% drop over twelve months.

All else being equal, a share price drop should make a stock more attractive to potential investors. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. So, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. 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). A high P/E ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.

Check out our latest analysis for RSA Insurance Group

Does RSA Insurance Group Have A Relatively High Or Low P/E For Its Industry?

RSA Insurance Group's P/E is 10.03. As you can see below RSA Insurance Group has a P/E ratio that is fairly close for the average for the insurance industry, which is 10.4.

Its P/E ratio suggests that RSA Insurance Group shareholders think that in the future it will perform about the same as other companies in its industry classification. So if RSA Insurance Group actually outperforms its peers going forward, that should be a positive for the share price. I would further inform my view by checking insider buying and selling., among other things.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

RSA Insurance Group increased earnings per share by 2.6% last year. And it has improved its earnings per share by 95% per year over the last three years.

Remember: P/E Ratios Don't Consider The Balance Sheet

The 'Price' in P/E reflects the market capitalization of the company. Thus, the metric does not reflect cash or debt held by the company. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

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.

How Does RSA Insurance Group's Debt Impact Its P/E Ratio?

RSA Insurance Group has net cash of UK£5.0m. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.

The Verdict On RSA Insurance Group's P/E Ratio

RSA Insurance Group trades on a P/E ratio of 10.0, which is below the GB market average of 11.1. Earnings improved over the last year. And the healthy balance sheet means the company can sustain growth while the P/E suggests shareholders don't think it will. Because analysts are predicting more growth in the future, one might have expected to see a higher P/E ratio. You can take a closer look at the fundamentals, here. What can be absolutely certain is that the market has become significantly less optimistic about RSA Insurance Group over the last month, with the P/E ratio falling from 17.5 back then to 10.0 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 have an opportunity when market expectations about a stock are wrong. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.

You might be able to find a better buy than RSA Insurance Group. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.