In This Article:
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll show how you can use Guardian Capital Group Limited’s (TSE:GCG.A) P/E ratio to inform your assessment of the investment opportunity. Guardian Capital Group has a P/E ratio of 6.18, based on the last twelve months. That means that at current prices, buyers pay CA$6.18 for every CA$1 in trailing yearly profits.
See our latest analysis for Guardian Capital Group
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Guardian Capital Group:
P/E of 6.18 = CA$21.5 ÷ CA$3.48 (Based on the trailing twelve months to September 2018.)
Is A High P/E Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each CA$1 the company has earned over the last year. All else being equal, it’s better to pay a low price — but as Warren Buffett said, ‘It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.’
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. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.
It’s nice to see that Guardian Capital Group grew EPS by a stonking 34% in the last year. And its annual EPS growth rate over 5 years is 23%. With that performance, I would expect it to have an above average P/E ratio.
How Does Guardian Capital Group’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that Guardian Capital Group has a lower P/E than the average (12.7) P/E for companies in the capital markets industry.
This suggests that market participants think Guardian Capital Group will underperform other companies in its industry. Many investors like to buy stocks when the market is pessimistic about their prospects. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
Remember: P/E Ratios Don’t Consider The Balance Sheet
It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. That means it doesn’t take debt or cash into account. Theoretically, a business can improve its earnings (and produce a lower P/E in the future), by taking on debt (or spending its remaining cash).