It’s not a stretch to say that E-L Financial Corporation Limited’s (TSE:ELF) price-to-earnings (or “P/E”) ratio of 15.6x right now seems quite “middle-of-the-road” compared to the market in Canada, where the median P/E ratio is around 17x. Although, it’s not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.
For example, consider that E-L Financial’s financial performance has been poor lately as it’s earnings have been in decline. One possibility is that the P/E is moderate because investors think the company might still do enough to be in line with the broader market in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.
Check out our latest analysis for E-L Financial
Although there are no analyst estimates available for E-L Financial, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.
Does Growth Match The P/E?
The only time you’d be comfortable seeing a P/E like E-L Financial’s is when the company’s growth is tracking the market closely.
Retrospectively, the last year delivered a frustrating 11% decrease to the company’s bottom line. As a result, earnings from three years ago have also fallen 76% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
Weighing that medium-term earnings trajectory against the broader market’s one-year forecast for expansion of 9.3% shows it’s an unpleasant look.
With this information, we find it concerning that E-L Financial is trading at a fairly similar P/E to the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company’s business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh on the share price eventually.
The Bottom Line On E-L Financial’s P/E
Typically, we’d caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
We’ve established that E-L Financial currently trades on a higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are uncomfortable with the P/E as this earnings performance is unlikely to support a more positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders’ investments at risk and potential investors in danger of paying an unnecessary premium.
Plus, you should also learn about this 1 warning sign we’ve spotted with E-L Financial.
It’s important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20x).
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. 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.
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