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When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 16x, you may consider Dollar General Corporation (NYSE:DG) as a stock to potentially avoid with its 24.4x 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.
Recent times have been advantageous for Dollar General as its earnings have been rising faster than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.
Does Dollar General Have A Relatively High Or Low P/E For Its Industry?
An inspection of average P/E's throughout Dollar General's industry may help to explain its high P/E ratio. The image below shows that the Multiline Retail industry as a whole has a P/E ratio significantly higher than the market. So we'd say there could be some merit in the premise that the company's ratio being shaped by its industry at this time. In the context of the Multiline Retail industry's current setting, most of its constituents' P/E's would be expected to be raised up greatly. Still, the strength of the company's earnings will most likely determine where its P/E shall sit.
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Dollar General.
How Is Dollar General's Growth Trending?
Dollar General's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.
Taking a look back first, we see that the company grew earnings per share by an impressive 27% last year. The latest three year period has also seen an excellent 75% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.
Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 8.4% each year over the next three years. That's shaping up to be similar to the 9.3% each year growth forecast for the broader market.
In light of this, it's curious that Dollar General'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 Dollar General'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.
Our examination of Dollar General's analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. 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.
There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Dollar General that you should be aware of.
If these risks are making you reconsider your opinion on Dollar General, explore our interactive list of high quality stocks to get an idea of what else is out there.
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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