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How Does NatureBank Asset Management's (CVE:COO) P/E Compare To Its Industry, After Its Big Share Price Gain?

Simply Wall St

NatureBank Asset Management (CVE:COO) shares have had a really impressive month, gaining 33%, after some slippage. And the full year gain of 33% isn't too shabby, either!

Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. The implication here is that deep value investors might steer clear when expectations of a company are too high. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). A high P/E implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.

See our latest analysis for NatureBank Asset Management

How Does NatureBank Asset Management's P/E Ratio Compare To Its Peers?

NatureBank Asset Management's P/E of 1.90 indicates relatively low sentiment towards the stock. If you look at the image below, you can see NatureBank Asset Management has a lower P/E than the average (16.9) in the commercial services industry classification.

TSXV:COO Price Estimation Relative to Market, January 18th 2020

Its relatively low P/E ratio indicates that NatureBank Asset Management shareholders think it will struggle to do as well as other companies in its industry classification. Many investors like to buy stocks when the market is pessimistic about their prospects. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.

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. Then, a lower P/E should attract more buyers, pushing the share price up.

NatureBank Asset Management's earnings per share fell by 9.2% in the last twelve months.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

Don't forget that the P/E ratio considers market capitalization. So it won't reflect the advantage of cash, or disadvantage of debt. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.

NatureBank Asset Management's Balance Sheet

Net debt totals 15% of NatureBank Asset Management's market cap. It would probably deserve a higher P/E ratio if it was net cash, since it would have more options for growth.

The Bottom Line On NatureBank Asset Management's P/E Ratio

NatureBank Asset Management trades on a P/E ratio of 1.9, which is below the CA market average of 15.8. Since it only carries a modest debt load, it's likely the low expectations implied by the P/E ratio arise from the lack of recent earnings growth. What is very clear is that the market has become less pessimistic about NatureBank Asset Management over the last month, with the P/E ratio rising from 1.4 back then to 1.9 today. If you like to buy stocks that could be turnaround opportunities, then this one might be a candidate; but if you're more sensitive to price, then you may feel the opportunity has passed.

Investors should be looking to buy stocks that the market is wrong about. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. We don't have analyst forecasts, but you might want to assess this data-rich visualization of earnings, revenue and cash flow.

Of course you might be able to find a better stock than NatureBank Asset Management. So you may wish to see this free collection of other companies that have grown earnings strongly.

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.

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. Thank you for reading.