Yahoo Finance Do You Know What Genworth MI Canada Inc.'s (TSE:MIC) P/E Ratio Means?
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Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. To keep it practical, we'll show how Genworth MI Canada Inc.'s (TSE:MIC) P/E ratio could help you assess the value on offer. Genworth MI Canada has a P/E ratio of 8.95, based on the last twelve months. In other words, at today's prices, investors are paying CA$8.95 for every CA$1 in prior year profit.
See our latest analysis for Genworth MI Canada
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Genworth MI Canada:
P/E of 8.95 = CA$42.41 ÷ CA$4.74 (Based on the trailing twelve months to March 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.'
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the 'E' increases, over time. And in that case, the P/E ratio itself will drop rather quickly. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Genworth MI Canada saw earnings per share decrease by 21% last year. But it has grown its earnings per share by 3.6% per year over the last five years.
Does Genworth MI Canada Have A Relatively High Or Low P/E For Its Industry?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. If you look at the image below, you can see Genworth MI Canada has a lower P/E than the average (10.7) in the mortgage industry classification.
This suggests that market participants think Genworth MI Canada will underperform other companies in its industry. Since the market seems unimpressed with Genworth MI Canada, 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.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
The 'Price' in P/E reflects the market capitalization of the company. Thus, the metric does not reflect cash or debt held by the company. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
How Does Genworth MI Canada's Debt Impact Its P/E Ratio?
Net debt totals just 3.2% of Genworth MI Canada's market cap. The market might award it a higher P/E ratio if it had net cash, but its unlikely this low level of net borrowing is having a big impact on the P/E multiple.
The Verdict On Genworth MI Canada's P/E Ratio
Genworth MI Canada trades on a P/E ratio of 9, which is below the CA market average of 14.8. The debt levels are not a major concern, but the lack of EPS growth is likely weighing on sentiment.
When the market is wrong about a stock, it gives savvy investors an opportunity. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.
Of course you might be able to find a better stock than Genworth MI Canada. So you may wish to see this free collection of other companies that have grown earnings strongly.
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.
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. Thank you for reading.
