How Does NatureBank Asset Management's (CVE:COO) P/E Compare To Its Industry, After The Share Price Drop?
To the annoyance of some shareholders, NatureBank Asset Management (CVE:COO) shares are down a considerable 33% in the last month. Given the 60% drop over the last year, some shareholders might be worried that they have become bagholders. What is a bagholder? It is a shareholder who has suffered a bad loss, but continues to hold indefinitely, without questioning their reasons for holding, even as the losses grow greater.
Assuming nothing else has changed, a lower share price makes a stock more attractive to potential buyers. In the long term, share prices tend to follow earnings per share, but in the short term prices bounce around in response to short term factors (which are not always obvious). So, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.
See our latest analysis for NatureBank Asset Management
How Does NatureBank Asset Management's P/E Ratio Compare To Its Peers?
We can tell from its P/E ratio of 0.95 that sentiment around NatureBank Asset Management isn't particularly high. The image below shows that NatureBank Asset Management has a lower P/E than the average (16.4) P/E for companies in the commercial services industry.
Its relatively low P/E ratio indicates that NatureBank Asset Management shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with NatureBank Asset Management, it's quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. When earnings grow, the 'E' increases, over time. That means even if the current P/E is high, it will reduce over time if the share price stays flat. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
NatureBank Asset Management saw earnings per share decrease by 9.2% last year.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don't forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.
Is Debt Impacting NatureBank Asset Management's P/E?
Net debt is 30% of NatureBank Asset Management's market cap. While that's enough to warrant consideration, it doesn't really concern us.
The Verdict On NatureBank Asset Management's P/E Ratio
NatureBank Asset Management trades on a P/E ratio of 1.0, which is below the CA market average of 10.3. The debt levels are not a major concern, but the lack of EPS growth is likely weighing on sentiment. What can be absolutely certain is that the market has become more pessimistic about NatureBank Asset Management over the last month, with the P/E ratio falling from 1.4 back then to 1.0 today. For those who prefer invest in growth, this stock apparently offers limited promise, but the deep value investors may find the pessimism around this stock enticing.
Investors have an opportunity when market expectations about a stock are wrong. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine. Although we don't have analyst forecasts you might want to assess this data-rich visualization of earnings, revenue and cash flow.
Of course you might be able to find a better stock than NatureBank Asset Management. So you may wish to see this free collection of other companies that have grown earnings strongly.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.
