Benign Growth For Dr. Martens plc (LON:DOCS) Underpins Stock's 30% Plummet

The Dr. Martens plc (LON:DOCS) share price has fared very poorly over the last month, falling by a substantial 30%. For any long-term shareholders, the last month ends a year to forget by locking in a 65% share price decline.

Even after such a large drop in price, Dr. Martens' price-to-earnings (or "P/E") ratio of 7.2x might still make it look like a strong buy right now compared to the market in the United Kingdom, where around half of the companies have P/E ratios above 18x and even P/E's above 29x are quite common. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

Dr. Martens hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

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Does Growth Match The Low P/E?

In order to justify its P/E ratio, Dr. Martens would need to produce anemic growth that's substantially trailing 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 45%. Still, the latest three year period has seen an excellent 107% overall rise in EPS, in spite of its unsatisfying short-term performance. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Turning to the outlook, the next three years should generate growth of 2.9% per year as estimated by the seven analysts watching the company. That's shaping up to be materially lower than the 15% per year growth forecast for the broader market.

In light of this, it's understandable that Dr. Martens' P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Bottom Line On Dr. Martens' P/E

Dr. Martens' P/E looks about as weak as its stock price lately. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

As we suspected, our examination of Dr. Martens' analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

We don't want to rain on the parade too much, but we did also find 4 warning signs for Dr. Martens that you need to be mindful 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.