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. Nonetheless, we’d need to dig a little deeper to determine if there is a rational basis for the elevated P/E.
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. You’d really hope so, otherwise you’re paying a pretty hefty price for no particular reason.
Check out our latest analysis for CanWel Building Materials Group
How Is CanWel Building Materials Group’s Growth Trending?
CanWel Building Materials Group’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 growth, the company posted a terrific increase of 43%. However, this wasn’t enough as the latest three year period has seen a very unpleasant 22% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
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.
In light of this, it’s understandable that CanWel Building Materials Group’s P/E sits above the majority of other companies. Apparently shareholders aren’t keen to offload something that is potentially eyeing a more prosperous future.
The Bottom Line On CanWel Building Materials Group’s P/E
Typically, we’d caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
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.
It’s always necessary to consider the ever-present spectre of investment risk. We’ve identified 3 warning signs with CanWel Building Materials Group (at least 1 which shouldn’t be ignored), and understanding them should be part of your investment process.
If you’re unsure about the strength of CanWel Building Materials Group’s business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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