Definity Financial Corporation's (TSE:DFY) Popularity With Investors Is Clear

When close to half the companies in Canada have price-to-earnings ratios (or "P/E's") below 16x, you may consider Definity Financial Corporation (TSE:DFY) as a stock to potentially avoid with its 22.8x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

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Definity Financial 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.

Check out our latest analysis for Definity Financial

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Definity Financial.

How Is Definity Financial's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as high as Definity Financial's is when the company's growth is on track to outshine the market.

Taking a look back first, we see that there was hardly any earnings per share growth to speak of for the company over the past year. Likewise, not much has changed from three years ago as earnings have been stuck during that whole time. Accordingly, shareholders probably wouldn't have been satisfied with the complete absence of medium-term growth.

Looking ahead now, EPS is anticipated to climb by 17% each year during the coming three years according to the eight analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 11% per annum, which is noticeably less attractive.

With this information, we can see why Definity Financial is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On Definity Financial's P/E

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Definity Financial maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for Definity Financial with six simple checks.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.