Is AGF Management Limited (TSE:AGF.B) A Buy At Its Current PE Ratio?
AGF Management Limited (TSX:AGF.B) trades with a trailing P/E of 10.2x, which is lower than the industry average of 13.4x. While AGF.B might seem like an attractive stock to buy, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for. See our latest analysis for AGF Management
Breaking down the Price-Earnings ratio
P/E is often used for relative valuation since earnings power is a chief driver of investment value. By comparing a stock’s price per share to its earnings per share, we are able to see how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for AGF.B
Price-Earnings Ratio = Price per share ÷ Earnings per share
AGF.B Price-Earnings Ratio = CA$6.7 ÷ CA$0.657 = 10.2x
On its own, the P/E ratio doesn’t tell you much; however, it becomes extremely useful when you compare it with other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to AGF.B, such as capital structure and profitability. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. AGF.B’s P/E of 10.2x is lower than its industry peers (13.4x), which implies that each dollar of AGF.B’s earnings is being undervalued by investors. As such, our analysis shows that AGF.B represents an under-priced stock.
Assumptions to be aware of
Before you jump to the conclusion that AGF.B is the perfect buying opportunity, it is important to realise that our conclusion rests on two assertions. The first is that our “similar companies” are actually similar to AGF.B, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with AGF.B, then its P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing AGF.B to are fairly valued by the market. If this does not hold true, AGF.B’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
To help readers see pass 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.
