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Investors Still Waiting For A Pull Back In CanWel Building Materials Group Ltd. (TSE:CWX)

Simply Wall St
·3 min read

CanWel Building Materials Group Ltd.'s (TSE:CWX) price-to-earnings (or "P/E") ratio of 23x might make it look like a sell right now compared to the market in Canada, where around half of the companies have P/E ratios below 16x and even P/E's below 8x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's lofty.

With earnings growth that's superior to most other companies of late, CanWel Building Materials Group has been doing relatively well. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for CanWel Building Materials Group

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If you'd like to see what analysts are forecasting going forward, you should check out our free report on CanWel Building Materials Group.

Does Growth Match The High P/E?

In order to justify its P/E ratio, CanWel Building Materials Group would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered an exceptional 43% gain to the company's bottom line. Still, incredibly EPS has fallen 22% in total from three years ago, which is quite disappointing. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Turning to the outlook, the next year should generate growth of 37% as estimated by the seven analysts watching the company. That's shaping up to be materially higher than the 5.5% growth forecast for the broader market.

With this information, we can see why CanWel Building Materials Group is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On CanWel Building Materials Group's P/E

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of CanWel Building Materials Group's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

Before you take the next step, you should know about the 3 warning signs for CanWel Building Materials Group (1 is a bit unpleasant!) that we have uncovered.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20x).

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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.