Does The Caldwell Partners International Inc’s (TSE:CWL) PE Ratio Signal A Buying Opportunity?
The Caldwell Partners International Inc (TSX:CWL) is currently trading at a trailing P/E of 13.1x, which is lower than the industry average of 30.6x. Although some investors may jump to the conclusion that this is a great buying opportunity, understanding the assumptions behind the P/E ratio might change your mind. In this article, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. Check out our latest analysis for Caldwell Partners International
Breaking down the Price-Earnings ratio
A common ratio used for relative valuation is the P/E ratio. 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 CWL
Price-Earnings Ratio = Price per share ÷ Earnings per share
CWL Price-Earnings Ratio = CA$1.03 ÷ CA$0.079 = 13.1x
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 CWL, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use. CWL’s P/E of 13.1x is lower than its industry peers (30.6x), which implies that each dollar of CWL’s earnings is being undervalued by investors. As such, our analysis shows that CWL represents an under-priced stock.
Assumptions to watch out for
While our conclusion might prompt you to buy CWL immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to CWL. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you are comparing lower risk firms with CWL, 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 CWL to are fairly valued by the market. If this is violated, CWL’s P/E may be lower than its peers as they are actually expensive 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.
