The Descartes Systems Group Inc.'s (TSE:DSG) P/E Is On The Mark

The Descartes Systems Group Inc.'s (TSE:DSG) price-to-earnings (or "P/E") ratio of 66.1x 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 12x and even P/E's below 5x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Descartes Systems Group certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Descartes Systems Group

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

What Are Growth Metrics Telling Us About The High P/E?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Descartes Systems Group's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 24%. The latest three year period has also seen an excellent 143% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 19% per year as estimated by the eleven analysts watching the company. That's shaping up to be materially higher than the 5.8% each year growth forecast for the broader market.

With this information, we can see why Descartes Systems Group 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 Key Takeaway

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Descartes Systems Group 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. Unless these conditions change, they will continue to provide strong support to the share price.

A lot of potential risks can sit within a company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Descartes Systems Group with six simple checks.

Of course, you might also be able to find a better stock than Descartes Systems Group. 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.