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Should You Be Tempted To Sell Firm Capital Mortgage Investment Corporation (TSE:FC) At Its Current PE Ratio?

On its own, the P/E ratio doesn’t tell you much; however, it becomes extremely useful when you compare it with other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to FC, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use below. Since similar companies should technically have similar P/E ratios, we can very quickly come to some conclusions about the stock if the ratios differ.

Since FC’s P/E of 13.7x is higher than its industry peers (13.7x), it means that investors are paying more than they should for each dollar of FC’s earnings. This multiple is a median of profitable companies of 8 Mortgage companies in CA including Equitable Group, Genworth MI Canada and MCAN Mortgage. Therefore, according to this analysis, FC is an over-priced stock.

Assumptions to watch out for

Before you jump to the conclusion that FC should be banished from your portfolio, it is important to realise that our conclusion rests on two important assertions. The first is that our peer group actually contains companies that are similar to FC. If this isn’t the case, the difference in P/E could be due to some other factors. For example, if you accidentally compared lower growth firms with FC, then FC’s P/E would naturally be higher since investors would reward FC’s higher growth with a higher price. Alternatively, if you inadvertently compared riskier firms with FC, FC’s P/E would again be higher since investors would reward FC’s lower risk with a higher price as well. The second assumption that must hold true is that the stocks we are comparing FC to are fairly valued by the market. If this assumption is violated, FC’s P/E may be higher than its peers because its peers are actually undervalued by investors.

mortgage company is a company that borrows money from a bank, lends it to investors, isn't it?

I just wonder about its capital:all the money a mortgage company uses to lend is from banks?

No, some "mortgage companies" fund their own loans.