【skeleton of a toucan】Do You Like Guardian Capital Group Limited (TSE:GCG.A) At This P/E Ratio?

Theskeleton of a toucan goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll show how you can use Guardian Capital Group Limited’s (

TSE:GCG.A

) P/E ratio to inform your assessment of the investment opportunity.

Guardian Capital Group has a P/E ratio of 6.18

, based on the last twelve months. That means that at current prices, buyers pay CA$6.18 for every CA$1 in trailing yearly profits.

See our latest analysis for Guardian Capital Group

How Do You Calculate A P/E Ratio?

The

formula for price to earnings

is:

Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)

Or for Guardian Capital Group:

P/E of 6.18 = CA$21.5 ÷ CA$3.48 (Based on the trailing twelve months to September 2018.)

Is A High P/E Ratio Good?

A higher P/E ratio means that buyers have to pay

a higher price

for each CA$1 the company has earned over the last year. All else being equal, it’s better to pay a low price — but as Warren Buffett said, ‘It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.’

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. That means unless the share price increases, the P/E will reduce in a few years. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.

It’s nice to see that Guardian Capital Group grew EPS by a stonking 34% in the last year. And its annual EPS growth rate over 5 years is 23%. With that performance, I would expect it to have an above average P/E ratio.

How Does Guardian Capital Group’s P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that Guardian Capital Group has a lower P/E than the average (12.7) P/E for companies in the capital markets industry.

TSX:GCG.A PE PEG Gauge January 1st 19

This suggests that market participants think Guardian Capital Group will underperform other companies in its industry. Many investors like to buy stocks when the market is pessimistic about their prospects. If you consider the stock interesting, further research is recommended. For example, I often monitor

director buying and selling

.

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

It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. That means it doesn’t take debt or cash into account. Theoretically, a business can improve its earnings (and produce a lower P/E in the future), by taking on debt (or spending its remaining cash).

Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).

Is Debt Impacting Guardian Capital Group’s P/E?

Net debt totals just 5.1% of Guardian Capital Group’s market cap. So it doesn’t have as many options as it would with net cash, but its debt would not have much of an impact on its P/E ratio.

The Verdict On Guardian Capital Group’s P/E Ratio

Guardian Capital Group trades on a P/E ratio of 6.2, which is below the CA market average of 13.1. The company does have a little debt, and EPS growth was good last year. If it continues to grow, then the current low P/E may prove to be unjustified.

Investors should be looking to buy stocks that the market is wrong about. As value investor Benjamin Graham famously said, ‘In the short run, the market is a voting machine but in the long run, it is a weighing machine.’ 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 Guardian Capital 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).

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at

[email protected]

.

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