Getting In Cheap On FirstService Corporation (TSE:FSV) Might Be Difficult

FirstService Corporation's (TSE:FSV) price-to-earnings (or "P/E") ratio of 68.7x 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. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

FirstService has been struggling lately as its earnings have declined faster than most other companies. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for FirstService

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

Is There Enough Growth For FirstService?

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

Retrospectively, the last year delivered a frustrating 18% decrease to the company's bottom line. Regardless, EPS has managed to lift by a handy 9.4% in aggregate from three years ago, thanks to the earlier period of growth. So we can start by confirming that the company has generally done a good job of growing earnings over that time, even though it had some hiccups along the way.

Shifting to the future, estimates from the nine analysts covering the company suggest earnings should grow by 26% per annum over the next three years. That's shaping up to be materially higher than the 8.2% per year growth forecast for the broader market.

With this information, we can see why FirstService is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

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.

We've established that FirstService maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with FirstService, and understanding these should be part of your investment process.

Of course, you might also be able to find a better stock than FirstService. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.