What You Can Learn From AIA Group Limited's (HKG:1299) P/EAfter Its 25% Share Price Crash

AIA Group Limited (HKG:1299) shareholders that were waiting for something to happen have been dealt a blow with a 25% share price drop in the last month. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 43% share price drop.

In spite of the heavy fall in price, given close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") below 9x, you may still consider AIA Group as a stock to avoid entirely with its 18.5x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

AIA Group certainly has been doing a good job lately as it's been growing earnings more than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for AIA Group

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

Is There Enough Growth For AIA Group?

In order to justify its P/E ratio, AIA Group would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered an exceptional 17% gain to the company's bottom line. Still, incredibly EPS has fallen 30% in total from three years ago, which is quite disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 25% per annum as estimated by the analysts watching the company. With the market only predicted to deliver 15% per annum, the company is positioned for a stronger earnings result.

With this information, we can see why AIA 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.

What We Can Learn From AIA Group's P/E?

Even after such a strong price drop, AIA Group's P/E still exceeds the rest of the market significantly. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that AIA Group maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for AIA Group with six simple checks on some of these key factors.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.