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Some Shareholders Feeling Restless Over Admiral Group plc's (LON:ADM) P/E Ratio

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Simply Wall St
·4 min read
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It's not a stretch to say that Admiral Group plc's (LON:ADM) price-to-earnings (or "P/E") ratio of 15.4x right now seems quite "middle-of-the-road" compared to the market in the United Kingdom, where the median P/E ratio is around 15x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

With earnings growth that's superior to most other companies of late, Admiral 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 Admiral Group

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

An inspection of the typical P/E's throughout Admiral Group's industry may help to explain its fairly average P/E ratio. The image below shows that the Insurance industry as a whole has a P/E ratio lower than the market. So it appears the company's ratio isn't really influenced by these industry numbers currently. Some industry P/E's don't move around a lot and right now most companies within the Insurance industry should be getting stifled. Whilst this can be a heavy component, industry factors are normally secondary to company financials and earnings.

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

What Are Growth Metrics Telling Us About The P/E?

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

If we review the last year of earnings growth, the company posted a worthy increase of 8.2%. This was backed up an excellent period prior to see EPS up by 89% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to slump, contracting by 2.9% per year during the coming three years according to the ten analysts following the company. With the market predicted to deliver 8.4% growth per annum, that's a disappointing outcome.

In light of this, it's somewhat alarming that Admiral Group's P/E sits in line with the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. 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 Key Takeaway

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.

Our examination of Admiral Group's analyst forecasts revealed that its outlook for shrinking earnings isn't impacting its P/E as much as we would have predicted. 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.

It is also worth noting that we have found 3 warning signs for Admiral Group (1 is potentially serious!) that you need to take into consideration.

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

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. 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.

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