Yahoo Finance Should You Buy CannTrust Holdings Inc (TSE:TRST) At This PE Ratio?
CannTrust Holdings Inc (TSX:TRST) trades with a trailing P/E of 38.4x, which is lower than the industry average of 48x. While this makes TRST appear like a great stock to buy, you might change your mind after I explain the assumptions behind the P/E ratio. Today, I will explain what the P/E ratio is as well as what you should look out for when using it. See our latest analysis for CannTrust Holdings
Breaking down the P/E ratio
The P/E ratio is one of many ratios used in relative valuation. It compares a stock’s price per share to the stock’s earnings per share. A more intuitive way of understanding the P/E ratio is to think of it as how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for TRST
Price-Earnings Ratio = Price per share ÷ Earnings per share
TRST Price-Earnings Ratio = CA$8.87 ÷ CA$0.231 = 38.4x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to TRST, such as capital structure and profitability. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. Since TRST’s P/E of 38.4x is lower than its industry peers (48x), it means that investors are paying less than they should for each dollar of TRST’s earnings. As such, our analysis shows that TRST represents an under-priced stock.
Assumptions to watch out for
Before you jump to the conclusion that TRST is the perfect buying opportunity, it is important to realise that our conclusion rests on two assertions. The first is that our “similar companies” are actually similar to TRST, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with TRST, then its P/E would naturally be lower than its peers, as investors would value those with lower risk at a higher price. The second assumption that must hold true is that the stocks we are comparing TRST to are fairly valued by the market. If this does not hold true, TRST’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
What this means for you:
Since you may have already conducted your due diligence on TRST, the undervaluation of the stock may mean it is a good time to top up on your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I’ve outlined above. Remember that basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PE ratio is very one-dimensional. If you have not done so already, I urge you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for TRST’s future growth? Take a look at our free research report of analyst consensus for TRST’s outlook.
Financial Health: Is TRST’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
