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Read This Before You Buy Calian Group Ltd. (TSE:CGY) Because Of Its P/E Ratio

Simply Wall St

Calian Group (TSE:CGY) shares have retraced a considerable in the last month. But there's still good reason for shareholders to be content; the stock has gained 16% in the last 90 days. The stock has been solid, longer term, gaining 33% in the last year.

All else being equal, a sharp share price increase should make a stock less attractive to potential investors. 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. So some would prefer to hold off buying when there is a lot of optimism towards a stock. 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.

Check out our latest analysis for Calian Group

Does Calian Group Have A Relatively High Or Low P/E For Its Industry?

Calian Group's P/E is 15.57. As you can see below Calian Group has a P/E ratio that is fairly close for the average for the commercial services industry, which is 15.5.

TSX:CGY Price Estimation Relative to Market, November 30th 2019

Its P/E ratio suggests that Calian Group shareholders think that in the future it will perform about the same as other companies in its industry classification. The company could surprise by performing better than average, in the future. Further research into factors such as insider buying and selling, could help you form your own view on whether that is likely.

How Growth Rates Impact P/E Ratios

Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

It's great to see that Calian Group grew EPS by 21% in the last year. And earnings per share have improved by 12% annually, over the last five years. With that performance, you might expect an above average P/E ratio.

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

The 'Price' in P/E reflects the market capitalization of the company. That means it doesn't take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).

Is Debt Impacting Calian Group's P/E?

The extra options and safety that comes with Calian Group's CA$4.1m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.

The Verdict On Calian Group's P/E Ratio

Calian Group's P/E is 15.6 which is about average (14.7) in the CA market. The balance sheet is healthy, and recent EPS growth impressive, but the P/E implies some caution from the market. What can be absolutely certain is that the market has become less optimistic about Calian Group over the last month, with the P/E ratio falling from 15.6 back then to 15.6 today. For those who don't like to trade against momentum, that could be a warning sign, but a contrarian investor might want to take a closer look.

Investors have an opportunity when market expectations about a stock are wrong. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

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.