Dominion Lending Centres Inc.'s (TSE:DLCG) 33% Price Boost Is Out Of Tune With Earnings

Despite an already strong run, Dominion Lending Centres Inc. (TSE:DLCG) shares have been powering on, with a gain of 33% in the last thirty days. The annual gain comes to 133% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, Dominion Lending Centres' price-to-earnings (or "P/E") ratio of 24.1x might make it look like a strong sell right now compared to the market in Canada, where around half of the companies have P/E ratios below 15x and even P/E's below 7x are quite common. 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.

For instance, Dominion Lending Centres' receding earnings in recent times would have to be some food for thought. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

Check out our latest analysis for Dominion Lending Centres

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Dominion Lending Centres' earnings, revenue and cash flow.

How Is Dominion Lending Centres' Growth Trending?

In order to justify its P/E ratio, Dominion Lending Centres would need to produce outstanding growth well in excess of the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 60%. This means it has also seen a slide in earnings over the longer-term as EPS is down 49% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Comparing that to the market, which is predicted to deliver 26% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

With this information, we find it concerning that Dominion Lending Centres is trading at a P/E higher than the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Bottom Line On Dominion Lending Centres' P/E

The strong share price surge has got Dominion Lending Centres' P/E rushing to great heights as well. 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 Dominion Lending Centres currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Plus, you should also learn about these 3 warning signs we've spotted with Dominion Lending Centres (including 1 which is significant).

Of course, you might also be able to find a better stock than Dominion Lending Centres. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.