Doman Building Materials Group Ltd. (TSE:DBM) Surges 25% Yet Its Low P/E Is No Reason For Excitement

Despite an already strong run, Doman Building Materials Group Ltd. (TSE:DBM) shares have been powering on, with a gain of 25% in the last thirty days. Looking further back, the 19% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Even after such a large jump in price, Doman Building Materials Group may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 12.2x, since almost half of all companies in Canada have P/E ratios greater than 16x and even P/E's higher than 32x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Recent times have been pleasing for Doman Building Materials Group 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.

See our latest analysis for Doman Building Materials Group

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Doman Building Materials Group.

Does Growth Match The Low P/E?

The only time you'd be truly comfortable seeing a P/E as low as Doman Building Materials Group's is when the company's growth is on track to lag the market.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 4.9% last year. However, this wasn't enough as the latest three year period has seen an unpleasant 57% overall drop in EPS. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Shifting to the future, estimates from the six analysts covering the company suggest earnings should grow by 21% over the next year. That's shaping up to be materially lower than the 26% growth forecast for the broader market.

In light of this, it's understandable that Doman Building Materials Group's P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Final Word

Despite Doman Building Materials Group's shares building up a head of steam, its P/E still lags most other companies. 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.

We've established that Doman Building Materials Group maintains its low P/E on the weakness of its forecast growth being lower than the wider market, 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.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Doman Building Materials Group (1 makes us a bit uncomfortable) you should be aware of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.