Want to participate in a short research study? Help shape the future of investing tools and earn a $40 gift card!
RediShred Capital Corp.'s (CVE:KUT) price-to-earnings (or "P/E") ratio of 16.1x 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 13x and even P/E's below 7x are quite common. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.
RediShred Capital could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.
Where Does RediShred Capital's P/E Sit Within Its Industry?
An inspection of average P/E's throughout RediShred Capital's industry may help to explain its high P/E ratio. You'll notice in the figure below that P/E ratios in the Commercial Services industry are significantly higher than the market. So it appears the company's ratio could be influenced somewhat by these industry numbers currently. In the context of the Commercial Services industry's current setting, most of its constituents' P/E's would be expected to be raised up greatly. Ultimately though, it's going to be the fundamentals of the business like earnings and growth that count most.
Keen to find out how analysts think RediShred Capital's future stacks up against the industry? In that case, our free report is a great place to start.
How Is RediShred Capital's Growth Trending?
RediShred Capital's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 32%. Even so, admirably EPS has lifted 58% in aggregate from three years ago, notwithstanding the last 12 months. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.
Looking ahead now, EPS is anticipated to plummet, contracting by 96% during the coming year according to the three analysts following the company. Meanwhile, the broader market is forecast to moderate by 8.3%, which indicates the company should perform poorly indeed.
In light of this, it's odd that RediShred Capital's P/E sits above the majority of other companies. When earnings shrink rapidly often the P/E premium shrinks too, which could set up shareholders for future disappointment. Maintaining these prices will be extremely difficult to achieve as the weak outlook is likely to weigh down the shares eventually.
What We Can Learn From RediShred Capital's P/E?
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 RediShred Capital currently trades on a much higher than expected P/E since its earnings forecast is even worse than the struggling market. When we see a weak earnings outlook, we suspect the share price is at risk of declining, sending the high P/E lower. We're also cautious about the company's ability to resist even greater pain to its business from the broader market turmoil. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.
You need to take note of risks, for example - RediShred Capital has 4 warning signs (and 1 which can't be ignored) we think you should know about.
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 a strong growth track record, trading on a P/E 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 firstname.lastname@example.org.