Is CI Financial Corp (TSE:CIX) A Sell At Its Current PE Ratio?
CI Financial Corp (TSX:CIX) trades with a trailing P/E of 15.2x, which is higher than the industry average of 13.6x. While CIX might seem like a stock to avoid or sell if you own it, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. Today, I will explain what the P/E ratio is as well as what you should look out for when using it. View our latest analysis for CI Financial
What you need to know about the P/E ratio
The P/E ratio is a popular ratio used in relative valuation since earnings power is a key driver of investment value. It compares a stock’s price per share to the stock’s earnings per share. A more intuitive way of understanding the P/E ratio is to think of it as how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for CIX
Price-Earnings Ratio = Price per share ÷ Earnings per share
CIX Price-Earnings Ratio = CA$28.68 ÷ CA$1.891 = 15.2x
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 CIX, such as capital structure and profitability. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. At 15.2x, CIX’s P/E is higher than its industry peers (13.6x). This implies that investors are overvaluing each dollar of CIX’s earnings. As such, our analysis shows that CIX represents an over-priced stock.
Assumptions to watch out for
However, before you rush out to sell your CIX shares, it is important to note that this conclusion is based on two key assumptions. The first is that our “similar companies” are actually similar to CIX, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with CIX, then its P/E would naturally be lower than its peers, as investors would value those with lower risk at a higher price. The second assumption that must hold true is that the stocks we are comparing CIX to are fairly valued by the market. If this is violated, CIX’s P/E may be lower than its peers as they are actually overvalued by investors.
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.
