Assured Guaranty Ltd.'s (NYSE:AGO) price-to-earnings (or "P/E") ratio of 6.1x might make it look like a strong buy right now compared to the market in the United States, where around half of the companies have P/E ratios above 19x and even P/E's above 34x 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 limited.

Recent times have been pleasing for Assured Guaranty as its earnings have risen in spite of the market's earnings going into reverse. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Want the full picture on analyst estimates for the company? Then our free report on Assured Guaranty will help you uncover what's on the horizon.

Is There Any Growth For Assured Guaranty?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Assured Guaranty's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 146% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 212% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to slump, contracting by 16% per annum during the coming three years according to the four analysts following the company. That's not great when the rest of the market is expected to grow by 11% each year.

With this information, we are not surprised that Assured Guaranty is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Bottom Line On Assured Guaranty's P/E

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Assured Guaranty maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Plus, you should also learn about these 4 warning signs we've spotted with Assured Guaranty (including 1 which doesn't sit too well with us).

If you're unsure about the strength of Assured Guaranty's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.