Why Investors Shouldn't Be Surprised By Dollar Industries Limited's (NSE:DOLLAR) P/E

When close to half the companies in India have price-to-earnings ratios (or "P/E's") below 29x, you may consider Dollar Industries Limited (NSE:DOLLAR) as a stock to avoid entirely with its 45.6x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

While the market has experienced earnings growth lately, Dollar Industries' earnings have gone into reverse gear, which is not great. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

See our latest analysis for Dollar Industries

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

How Is Dollar Industries' Growth Trending?

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

Retrospectively, the last year delivered a frustrating 35% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 26% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 136% during the coming year according to the two analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 24%, which is noticeably less attractive.

In light of this, it's understandable that Dollar Industries' P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On Dollar Industries' P/E

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Dollar Industries 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.

Having said that, be aware Dollar Industries is showing 2 warning signs in our investment analysis, you should know about.

If these risks are making you reconsider your opinion on Dollar Industries, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.