Despite Its High P/E Ratio, Is Timbercreek Financial Corporation (TSE:TF) Still Undervalued?
This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). To keep it practical, we'll show how Timbercreek Financial Corporation's (TSE:TF) P/E ratio could help you assess the value on offer. What is Timbercreek Financial's P/E ratio? Well, based on the last twelve months it is 13.91. That corresponds to an earnings yield of approximately 7.2%.
See our latest analysis for Timbercreek Financial
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Timbercreek Financial:
P/E of 13.91 = CA$9.53 ÷ CA$0.68 (Based on the trailing twelve months to June 2019.)
Is A High Price-to-Earnings Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
Does Timbercreek Financial Have A Relatively High Or Low P/E For Its Industry?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. As you can see below Timbercreek Financial has a P/E ratio that is fairly close for the average for the mortgage industry, which is 13.9.
That indicates that the market expects Timbercreek Financial will perform roughly in line with other companies in its industry. So if Timbercreek Financial actually outperforms its peers going forward, that should be a positive for the share price. I would further inform my view by checking insider buying and selling., among other things.
How Growth Rates Impact P/E Ratios
When earnings fall, the 'E' decreases, over time. That means even if the current P/E is low, it will increase over time if the share price stays flat. Then, a higher P/E might scare off shareholders, pushing the share price down.
Timbercreek Financial's earnings per share grew by -3.9% in the last twelve months. In contrast, EPS has decreased by 6.1%, annually, over 5 years.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don't forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.
While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.
Timbercreek Financial's Balance Sheet
Timbercreek Financial has net debt worth a very significant 133% of its market capitalization. This is a relatively high level of debt, so the stock probably deserves a relatively low P/E ratio. Keep that in mind when comparing it to other companies.
The Verdict On Timbercreek Financial's P/E Ratio
Timbercreek Financial has a P/E of 13.9. That's around the same as the average in the CA market, which is 13.7. It has significant debt, though the market seems to take confidence from recent earnings growth.
When the market is wrong about a stock, it gives savvy investors an opportunity. 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.
But note: Timbercreek Financial may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
