Market Participants Recognise Colabor Group Inc.'s (TSE:GCL) Earnings

Colabor Group Inc.'s (TSE:GCL) price-to-earnings (or "P/E") ratio of 24.6x might make it look like a strong 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 quite high for a reason and it requires further investigation to determine if it's justified.

Recent times haven't been advantageous for Colabor Group as its earnings have been falling quicker than most other companies. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Colabor Group

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Colabor Group.

What Are Growth Metrics Telling Us About The High P/E?

In order to justify its P/E ratio, Colabor Group would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered a frustrating 24% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 5.2% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the only analyst covering the company suggest earnings should grow by 58% per year over the next three years. That's shaping up to be materially higher than the 7.2% each year growth forecast for the broader market.

In light of this, it's understandable that Colabor Group's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

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.

As we suspected, our examination of Colabor Group's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

You need to take note of risks, for example - Colabor Group has 3 warning signs (and 1 which is a bit unpleasant) we think you should know about.

If you're unsure about the strength of Colabor 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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.