Dream Finders Homes, Inc.'s (NASDAQ:DFH) Shares Not Telling The Full Story

By
Simply Wall St
Published
May 11, 2022
NasdaqGS:DFH
Source: Shutterstock

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 16x, you may consider Dream Finders Homes, Inc. (NASDAQ:DFH) as an attractive investment with its 10.4x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Recent times have been advantageous for Dream Finders Homes as its earnings have been rising faster than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. 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 Dream Finders Homes

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NasdaqGS:DFH Price Based on Past Earnings May 11th 2022
Keen to find out how analysts think Dream Finders Homes' future stacks up against the industry? In that case, our free report is a great place to start.

Does Growth Match The Low P/E?

The only time you'd be truly comfortable seeing a P/E as low as Dream Finders Homes' is when the company's growth is on track to lag the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 123% last year. However, this wasn't enough as the latest three year period has seen a very unpleasant 99% drop in EPS in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 38% during the coming year according to the three analysts following the company. With the market only predicted to deliver 10.0%, the company is positioned for a stronger earnings result.

In light of this, it's peculiar that Dream Finders Homes' P/E sits below the majority of other companies. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

The Key Takeaway

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Dream Finders Homes currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.

Before you take the next step, you should know about the 2 warning signs for Dream Finders Homes (1 doesn't sit too well with us!) that we have uncovered.

If P/E ratios interest you, you may wish to see this free collection of other companies that have grown earnings strongly and trade on P/E's below 20x.

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