This article is intended for those of you who are at the beginning of your investing journey and want to better understand how you can grow your money by investing in Grand Peak Capital Corp (CNSX:GPK).
Grand Peak Capital Corp (CNSX:GPK) is currently trading at a trailing P/E of 4x, which is lower than the industry average of 12x. While this makes GPK appear like a great stock to buy, you might change your mind after I explain the assumptions behind the P/E ratio. Today, I will explain what the P/E ratio is as well as what you should look out for when using it. See our latest analysis for Grand Peak Capital
Breaking down the Price-Earnings ratio
P/E is often used for relative valuation since earnings power is a chief driver of investment value. By comparing a stock’s price per share to its earnings per share, we are able to see how much investors are paying for each dollar of the company’s earnings.
Price-Earnings Ratio = Price per share ÷ Earnings per share
P/E Calculation for GPK
Price per share = CA$0.36
Earnings per share = CA$0.0893
∴ Price-Earnings Ratio = CA$0.36 ÷ CA$0.0893 = 4x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. Ideally, we want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as GPK, such as size and country of operation. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. Since similar companies should technically have similar P/E ratios, we can very quickly come to some conclusions about the stock if the ratios differ.
Since GPK’s P/E of 4x is lower than its industry peers (12x), it means that investors are paying less than they should for each dollar of GPK’s earnings. This multiple is a median of profitable companies of 24 Capital Markets companies in CA including Q Investments, CBi2 Capital and ThreeD Capital. Therefore, according to this analysis, GPK is an under-priced stock.
A few caveats
However, before you rush out to buy GPK, it is important to note that this conclusion is based on two key assumptions. The first is that our peer group actually contains companies that are similar to GPK. If this isn’t the case, the difference in P/E could be due to some other factors. For example, if you are inadvertently comparing lower risk firms with GPK, then GPK’s P/E would naturally be lower than its peers, since investors would value those with lower risk with a higher price. The other possibility is if you were accidentally comparing higher growth firms with GPK. In this case, GPK’s P/E would be lower since investors would also reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing GPK to are fairly valued by the market. If this does not hold, there is a possibility that GPK’s P/E is lower because firms in our peer group are being overvalued by the market.
What this means for you:
If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to add more of GPK to your portfolio. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned above. Remember that basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PE ratio is very one-dimensional. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for GPK’s future growth? Take a look at our free research report of analyst consensus for GPK’s outlook.
- Past Track Record: Has GPK been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of GPK’s historicals for more clarity.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.