Assured Guaranty Ltd.'s (NYSE:AGO) Low P/E No Reason For Excitement

Assured Guaranty Ltd.'s (NYSE:AGO) price-to-earnings (or "P/E") ratio of 6.4x might make it look like a strong buy right now compared to the market in the United States, where around half of the companies have P/E ratios above 20x and even P/E's above 35x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

With earnings growth that's superior to most other companies of late, Assured Guaranty has been doing relatively well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

View our latest analysis for Assured Guaranty

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

Does Growth Match The Low P/E?

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

Retrospectively, the last year delivered an exceptional 73% gain to the company's bottom line. The latest three year period has also seen an excellent 299% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to slump, contracting by 47% during the coming year according to the four analysts following the company. That's not great when the rest of the market is expected to grow by 15%.

In light of this, it's understandable that Assured Guaranty's P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

What We Can Learn From Assured Guaranty'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.

We've established that Assured Guaranty maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. 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 is also worth noting that we have found 2 warning signs for Assured Guaranty (1 shouldn't be ignored!) that you need to take into consideration.

Of course, you might also be able to find a better stock than Assured Guaranty. 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.