Why Investors Shouldn't Be Surprised By Dr. Martens plc's (LON:DOCS) 26% Share Price Surge

Dr. Martens plc (LON:DOCS) shareholders would be excited to see that the share price has had a great month, posting a 26% gain and recovering from prior weakness. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 49% over that time.

Even after such a large jump in price, there still wouldn't be many who think Dr. Martens' price-to-earnings (or "P/E") ratio of 13.9x is worth a mention when the median P/E in the United Kingdom is similar at about 14x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

Dr. Martens certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

See our latest analysis for Dr. Martens

Keen to find out how analysts think Dr. Martens' future stacks up against the industry? In that case, our free report is a great place to start.

How Is Dr. Martens' Growth Trending?

There's an inherent assumption that a company should be matching the market for P/E ratios like Dr. Martens' to be considered reasonable.

Retrospectively, the last year delivered an exceptional 422% gain to the company's bottom line. The latest three year period has also seen an excellent 953% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 12% per year as estimated by the seven analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 11% per year, which is not materially different.

With this information, we can see why Dr. Martens is trading at a fairly similar P/E to the market. Apparently shareholders are comfortable to simply hold on while the company is keeping a low profile.

The Key Takeaway

Dr. Martens' stock has a lot of momentum behind it lately, which has brought its P/E level with the market. 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.

As we suspected, our examination of Dr. Martens' analyst forecasts revealed that its market-matching earnings outlook is contributing to its current P/E. At this stage investors feel the potential for an improvement or deterioration in earnings isn't great enough to justify a high or low P/E ratio. It's hard to see the share price moving strongly in either direction in the near future under these circumstances.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Dr. Martens that you need to be mindful of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20x).

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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.