Why Investors Shouldn't Be Surprised By Dicker Data Limited's (ASX:DDR) P/E

Dicker Data Limited's (ASX:DDR) price-to-earnings (or "P/E") ratio of 21.2x might make it look like a sell right now compared to the market in Australia, where around half of the companies have P/E ratios below 15x and even P/E's below 9x are quite common. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Dicker Data certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Dicker Data

Although there are no analyst estimates available for Dicker Data, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Dicker Data's Growth Trending?

Dicker Data's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

If we review the last year of earnings growth, the company posted a terrific increase of 67%. The latest three year period has also seen an excellent 110% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

In contrast to the company, the rest of the market is expected to decline by 0.2% over the next year, which puts the company's recent medium-term positive growth rates in a good light for now.

In light of this, it's understandable that Dicker Data's P/E sits above the majority of other companies. Investors are willing to pay more for a stock they hope will buck the trend of the broader market going backwards. Nonetheless, with most other businesses facing an uphill battle, staying on its current earnings path is no certainty.

The Bottom Line On Dicker Data's P/E

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Dicker Data revealed its growing earnings over the medium-term are contributing to its high P/E, given the market is set to shrink. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Our only concern is whether its earnings trajectory can keep outperforming under these tough market conditions. Otherwise, it's hard to see the share price falling strongly in the near future if its earnings performance persists.

It is also worth noting that we have found 4 warning signs for Dicker Data (2 don't sit too well with us!) that you need to take into consideration.

You might be able to find a better investment than Dicker Data. 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).

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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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