AGF Management Limited (TSE:AGF.B) Stock Catapults 28% Though Its Price And Business Still Lag The Market

AGF Management Limited (TSE:AGF.B) shareholders would be excited to see that the share price has had a great month, posting a 28% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 48%.

In spite of the firm bounce in price, AGF Management may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 7.7x, since almost half of all companies in Canada have P/E ratios greater than 16x and even P/E's higher than 32x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Recent times haven't been advantageous for AGF Management as its earnings have been falling quicker than most other companies. The P/E is probably low because investors think this poor earnings performance isn't going to improve at all. You'd much rather the company wasn't bleeding earnings if you still believe in the business. Or at the very least, you'd be hoping the earnings slide doesn't get any worse if your plan is to pick up some stock while it's out of favour.

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How Is AGF Management's Growth Trending?

There's an inherent assumption that a company should underperform the market for P/E ratios like AGF Management's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 5.5% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 31% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to slump, contracting by 6.9% per year during the coming three years according to the six analysts following the company. That's not great when the rest of the market is expected to grow by 10% per annum.

In light of this, it's understandable that AGF Management's P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Bottom Line On AGF Management's P/E

The latest share price surge wasn't enough to lift AGF Management's P/E close to the market median. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

As we suspected, our examination of AGF Management's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

Before you take the next step, you should know about the 2 warning signs for AGF Management (1 is a bit unpleasant!) that we have uncovered.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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