When close to half the companies in Norway have price-to-earnings ratios (or "P/E's") above 12x, you may consider DOF Group ASA (OB:DOFG) as a highly attractive investment with its 4.9x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.
With earnings growth that's superior to most other companies of late, DOF Group has been doing relatively well. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.
Check out our latest analysis for DOF Group
Is There Any Growth For DOF Group?
The only time you'd be truly comfortable seeing a P/E as depressed as DOF Group's is when the company's growth is on track to lag the market decidedly.
Taking a look back first, we see that the company grew earnings per share by an impressive 18% last year. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.
Shifting to the future, estimates from the three analysts covering the company suggest earnings should grow by 4.5% per year over the next three years. That's shaping up to be materially lower than the 25% per annum growth forecast for the broader market.
With this information, we can see why DOF Group is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.
The Final Word
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.
As we suspected, our examination of DOF Group's 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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.
You need to take note of risks, for example - DOF Group has 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.
You might be able to find a better investment than DOF Group. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).
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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.
About OB:DOFG
Very undervalued with reasonable growth potential.
