Colabor Group Inc.'s (TSE:GCL) 36% Price Boost Is Out Of Tune With Earnings

The Colabor Group Inc. (TSE:GCL) share price has done very well over the last month, posting an excellent gain of 36%. The last month tops off a massive increase of 153% in the last year.

Since its price has surged higher, given close to half the companies in Canada have price-to-earnings ratios (or "P/E's") below 16x, you may consider Colabor Group as a stock to avoid entirely with its 30.9x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

Recent times have been quite advantageous for Colabor Group as its earnings have been rising very briskly. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Colabor Group

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Colabor Group will help you shine a light on its historical performance.

Is There Enough Growth For Colabor Group?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Colabor Group's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 425%. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

This is in contrast to the rest of the market, which is expected to grow by 25% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's alarming that Colabor Group's P/E sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Key Takeaway

The strong share price surge has got Colabor Group's P/E rushing to great heights as well. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

Our examination of Colabor Group revealed its three-year earnings trends aren't impacting its high P/E anywhere near as much as we would have predicted, given they look worse than current market expectations. Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

There are also other vital risk factors to consider and we've discovered 3 warning signs for Colabor Group (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

Of course, you might also be able to find a better stock than Colabor Group. So you may wish to see this free collection of other companies that sit on P/E's below 20x and have grown earnings strongly.

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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.
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