With a price-to-earnings (or "P/E") ratio of 59.2x Domain Holdings Australia Limited (ASX:DHG) may be sending very bearish signals at the moment, given that almost half of all companies in Australia have P/E ratios under 14x and even P/E's lower than 8x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.
Domain Holdings Australia could be doing better as it's been growing earnings less than most other companies lately. It might be that many expect the uninspiring earnings performance to recover significantly, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
Want the full picture on analyst estimates for the company? Then our free report on Domain Holdings Australia will help you uncover what's on the horizon.
What Are Growth Metrics Telling Us About The High P/E?
In order to justify its P/E ratio, Domain Holdings Australia would need to produce outstanding growth well in excess of the market.
Retrospectively, the last year delivered virtually the same number to the company's bottom line as the year before. The longer-term trend has been no better as the company has no earnings growth to show for over the last three years either. So it seems apparent to us that the company has struggled to grow earnings meaningfully over that time.
Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 43% each year over the next three years. With the market only predicted to deliver 13% each year, the company is positioned for a stronger earnings result.
In light of this, it's understandable that Domain Holdings Australia's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.
The Bottom Line On Domain Holdings Australia's P/E
Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
As we suspected, our examination of Domain Holdings Australia's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.
We don't want to rain on the parade too much, but we did also find 1 warning sign for Domain Holdings Australia that you need to be mindful of.
It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20x).
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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.
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