When close to half the companies in the United Kingdom have price-to-earnings ratios (or "P/E's") below 25x, you may consider Daily Mail and General Trust plc (LON:DMGT) as a stock to potentially avoid with its 34.5x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's lofty.
With earnings that are retreating more than the market's of late, Daily Mail and General Trust has been very sluggish. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. If not, then existing shareholders may be very nervous about the viability of the share price.
Want the full picture on analyst estimates for the company? Then our free report on Daily Mail and General Trust will help you uncover what's on the horizon.
Is There Enough Growth For Daily Mail and General Trust?
Daily Mail and General Trust's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.
Retrospectively, the last year delivered a frustrating 56% decrease to the company's bottom line. Unfortunately, that's brought it right back to where it started three years ago with EPS growth being virtually non-existent overall during that time. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.
Shifting to the future, estimates from the seven analysts covering the company suggest earnings should grow by 17% per annum over the next three years. With the market predicted to deliver 18% growth per annum, the company is positioned for a comparable earnings result.
In light of this, it's curious that Daily Mail and General Trust's P/E sits above the majority of other companies. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.
What We Can Learn From Daily Mail and General Trust's P/E?
We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
We've established that Daily Mail and General Trust currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.
Before you take the next step, you should know about the 3 warning signs for Daily Mail and General Trust that we have uncovered.
You might be able to find a better investment than Daily Mail and General Trust. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).
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. 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.
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