Yahoo Finance What Does The Toronto-Dominion Bank’s (TSE:TD) PE Ratio Tell You?
I am writing today to help inform people who are new to the stock market and want to learn about the link between company’s fundamentals and stock market performance.
The Toronto-Dominion Bank (TSE:TD) is currently trading at a trailing P/E of 14, which is higher than the industry average of 12.9. Though this might seem to be a negative, you might change your mind after I explain the assumptions behind the P/E ratio. In this article, I will explain what the P/E ratio is as well as what you should look out for when using it.
View our latest analysis for Toronto-Dominion Bank
Demystifying the P/E ratio
The P/E ratio is a popular ratio used in relative valuation since earnings power is a key driver of investment value. By comparing a stock’s price per share to its earnings per share, we are able to see how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for TD
Price-Earnings Ratio = Price per share ÷ Earnings per share
TD Price-Earnings Ratio = CA$79.31 ÷ CA$5.665 = 14x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. We want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as TD, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use. Since TD’s P/E of 14 is higher than its industry peers (12.9), it means that investors are paying more for each dollar of TD’s earnings. This multiple is a median of profitable companies of 8 Banks companies in CA including Laurentian Bank of Canada, Canadian Imperial Bank of Commerce and Bank of Nova Scotia. You could think of it like this: the market is pricing TD as if it is a stronger company than the average of its industry group.
Assumptions to watch out for
However, it is important to note that our examination of the stock is based on certain assumptions. The first is that our “similar companies” are actually similar to TD. If not, the difference in P/E might be a result of other factors. For example, if The Toronto-Dominion Bank is growing faster than its peers, then it would deserve a higher P/E ratio. We should also be aware that the stocks we are comparing to TD may not be fairly valued. So while we can reasonably surmise that it is optimistically valued relative to a peer group, it might be fairly valued, if the peer group is undervalued.
What this means for you:
Since you may have already conducted your due diligence on TD, the overvaluation of the stock may mean it is a good time to reduce 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 TD’s future growth? Take a look at our free research report of analyst consensus for TD’s outlook.
Past Track Record: Has TD been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of TD’s historicals for more clarity.
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 past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
