Calian Group Ltd. (TSE:CGY) Stocks Shoot Up 25% But Its P/E Still Looks Reasonable
Calian Group Ltd. (TSE:CGY) shares have had a really impressive month, gaining 25% after a shaky period beforehand. Looking back a bit further, it's encouraging to see the stock is up 26% in the last year.
After such a large jump in price, Calian Group's price-to-earnings (or "P/E") ratio of 33.6x 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 16x and even P/E's below 8x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.
Recent times have been advantageous for Calian Group as its earnings have been rising faster than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.
Check out our latest analysis for Calian Group
What Are Growth Metrics Telling Us About The High P/E?
There's an inherent assumption that a company should far outperform the market for P/E ratios like Calian Group's to be considered reasonable.
Retrospectively, the last year delivered an exceptional 88% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 51% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
Shifting to the future, estimates from the seven analysts covering the company suggest earnings should grow by 86% over the next year. With the market only predicted to deliver 23%, the company is positioned for a stronger earnings result.
With this information, we can see why Calian Group is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.
The Key Takeaway
Shares in Calian Group have built up some good momentum lately, which has really inflated its P/E. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
We've established that Calian Group 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 is also worth noting that we have found 1 warning sign for Calian Group that you need to take into consideration.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.
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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.