AGF Management Limited's (TSE:AGF.B) Share Price Is Matching Sentiment Around Its Earnings

When close to half the companies in Canada have price-to-earnings ratios (or "P/E's") above 15x, you may consider AGF Management Limited (TSE:AGF.B) as a highly attractive investment with its 7.1x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

AGF Management certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for AGF Management

Keen to find out how analysts think AGF Management's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Any Growth For AGF Management?

The only time you'd be truly comfortable seeing a P/E as depressed as AGF Management's is when the company's growth is on track to lag the market decidedly.

Retrospectively, the last year delivered a decent 12% gain to the company's bottom line. Pleasingly, EPS has also lifted 166% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to slump, contracting by 7.7% each year during the coming three years according to the six analysts following the company. With the market predicted to deliver 12% growth each year, that's a disappointing outcome.

With this information, we are not surprised that AGF Management is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. 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

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with AGF Management (at least 1 which doesn't sit too well with us), and understanding these should be part of your investment process.

If these risks are making you reconsider your opinion on AGF Management, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.