Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

What These Ratios Tell Us About Aviva Plc (ADR) (AV)

LONDON — Before I decide whether to buy a company’s shares, I always like to look at its return on equity.

This key ratio helps me to understand how successful a company is at generating profits using shareholders’ funds, and often has a strong correlation with dividend payments and share price growth.

FTSE 100 insurance firm Aviva Plc (ADR) (NYSE:AV) has had a tough couple of years, but I think things are now starting to turn around, as I’ll explain.

Aviva Plc

Return on equity
The return a company generates on its shareholders’ funds is known as return on equity, or ROE. Return on equity can be calculated by dividing a company’s annual earnings by its equity (i.e., the difference between its total assets and its total liabilities) and is expressed as a percentage.

Let’s take a look at Aviva’s ROE from the last five years:

Aviva 2008 2009 2010 2011 2012 Average
ROE 12.7% 10.9% 14.8% 12% 10.3% 12.1%

Aviva Plc (ADR) (NYSE:AV)’s return on equity has dropped steadily over the last three years, but I think this year may see an improvement as the company’s turnaround plan starts to work.

Aviva Plc (ADR) (NYSE:AV)’s first-quarter interim management statement was encouraging, reporting an 18% rise in the value of new business gained in the quarter, a £300 million reduction in internal debt and a 10% fall in operating expenses.

Does Aviva have enough cash?
One of the reasons that Aviva Plc (ADR) (NYSE:AV)‘s share price has been so low for the last two years is that investors thought that it lacked the financial strength to deal with the possible fallout from the eurozone crisis.

A recognised measure of an insurance company’s financial strength is its Insurance Groups Directive (IGD) capital coverage ratio. This measures the amount of surplus capital held by an insurance company, in excess of its regulatory requirements.

In the table below, I’ve listed Aviva Plc (ADR) (NYSE:AV)’s IGD capital coverage ratio and its ROE, alongside those of its peers, RSA Insurance Group plc (LON:RSA) and Prudential plc (LON:PRU):

Company IGD Capital
Coverage Ratio
5-Year Average ROE
RSA Insurance 190% 11.8%
Aviva 172% 12.1%
Prudential 250% 13.1%

Aviva’s IGD coverage ratio is the weakest of the three, but the firm’s new management have already managed to increase Aviva’s coverage ratio from a low of 125%, at the end of 2011.

Is Aviva a buy?
Aviva Plc (ADR) (NYSE:AV)‘s board is focusing on generating robust cash flows from fewer, more profitable businesses. The firm’s financial position has already improved, and despite this year’s dividend cut, Aviva shares still offer a prospective yield of 4.5%.

I rate Aviva as a buy, and plan to continue to top up my holding, while the price remains below 350 pence.


The article What These Ratios Tell Us About Aviva originally appeared on is written by Roland Head.

Roland owns shares in Aviva but does not own shares in any of the other companies mentioned in this article. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Biotech Stock Alert - 20% Guaranteed Return in One Year

Hedge Funds and Insiders Are Piling Into

One of 2015's best hedge funds and two insiders snapped up shares of this medical device stock recently. We believe its transformative and disruptive device will storm the $3+ billion market and help it achieve 500%-1000% gains in 3 years.

Get your FREE REPORT and the details of our 20% return guarantee today.

Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.
Loading Comments...

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 102% in 3 years!! Wondering How?

Download a complete edition of our newsletter for free!