Why Investors Shouldn't Be Surprised By Assured Guaranty Ltd.'s (NYSE:AGO) Low P/E

Assured Guaranty Ltd.'s (NYSE:AGO) price-to-earnings (or "P/E") ratio of 5.6x 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 18x and even P/E's above 32x are quite common. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Assured Guaranty has been doing quite well of late. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for Assured Guaranty

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

Is There Any Growth For Assured Guaranty?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 485% last year. The strong recent performance means it was also able to grow EPS by 167% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Shifting to the future, estimates from the three analysts covering the company suggest earnings growth is heading into negative territory, declining 17% per annum over the next three years. Meanwhile, the broader market is forecast to expand by 9.9% each year, which paints a poor picture.

In light of this, it's understandable that Assured Guaranty'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.

What We Can Learn From Assured Guaranty's P/E?

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 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.

Having said that, be aware Assured Guaranty is showing 3 warning signs in our investment analysis, and 1 of those is a bit unpleasant.

If these risks are making you reconsider your opinion on Assured Guaranty, 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.