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When close to half the companies in Canada have price-to-earnings ratios (or "P/E's") above 14x, you may consider Canaccord Genuity Group Inc. (TSE:CF) as an attractive investment with its 9.1x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
With earnings growth that's superior to most other companies of late, Canaccord Genuity Group has been doing relatively well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
Does Canaccord Genuity Group Have A Relatively High Or Low P/E For Its Industry?
An inspection of average P/E's throughout Canaccord Genuity Group's industry may help to explain its low P/E ratio. You'll notice in the figure below that P/E ratios in the Capital Markets industry are significantly higher than the market. So it appears the company's ratio isn't currently influenced by these industry numbers whatsoever. Ordinarily, the majority of companies' P/E's would be lifted firmly by the general conditions within the Capital Markets industry. Whilst this can be a heavy component, industry factors are normally secondary to company financials and earnings.
Keen to find out how analysts think Canaccord Genuity Group's future stacks up against the industry? In that case, our free report is a great place to start.
How Is Canaccord Genuity Group's Growth Trending?
There's an inherent assumption that a company should underperform the market for P/E ratios like Canaccord Genuity Group's to be considered reasonable.
Taking a look back first, we see that the company grew earnings per share by an impressive 34% last year. Pleasingly, EPS has also lifted 166% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.
Turning to the outlook, the next year should bring diminished returns, with earnings decreasing 0.4% as estimated by the three analysts watching the company. This is still shaping up to be materially better than the broader market which is also set to decline 7.8%.
With this information, it's perhaps strange but not a major surprise that Canaccord Genuity Group is trading at a lower P/E in comparison. With earnings going in reverse, it's not guaranteed that the P/E has found a floor yet. Even just maintaining these prices could be difficult achieve as the weak outlook is already weighing down the shares excessively.
The Key Takeaway
While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.
We've established that Canaccord Genuity Group currently trades on a much lower than expected P/E since its earnings forecast is not as bad as the struggling market. When we see this superior earnings outlook, we assume potential risks are what might be placing significant pressure on the P/E ratio. One major risk is whether its earnings trajectory can keep outperforming under these tough market conditions. It appears many are indeed anticipating earnings instability, because the company's current prospects should normally provide a boost to the share price.
You always need to take note of risks, for example - Canaccord Genuity Group has 3 warning signs we think you should be aware of.
Of course, you might also be able to find a better stock than Canaccord Genuity Group. So you may wish to see this free collection of other companies that sit on P/E's below 20x and have grown earnings strongly.
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.
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