What You Can Learn From Dave & Buster's Entertainment, Inc.'s (NASDAQ:PLAY) P/E After Its 26% Share Price Crash

The Dave & Buster's Entertainment, Inc. (NASDAQ:PLAY) share price has softened a substantial 26% over the previous 30 days, handing back much of the gains the stock has made lately. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 23% share price drop.

In spite of the heavy fall in price, given around half the companies in the United States have price-to-earnings ratios (or "P/E's") below 19x, you may still consider Dave & Buster's Entertainment as a stock to potentially avoid with its 22.7x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

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Dave & Buster's Entertainment hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. 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.

Check out our latest analysis for Dave & Buster's Entertainment

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

What Are Growth Metrics Telling Us About The High P/E?

There's an inherent assumption that a company should outperform the market for P/E ratios like Dave & Buster's Entertainment's to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 57%. This means it has also seen a slide in earnings over the longer-term as EPS is down 65% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Turning to the outlook, the next three years should generate growth of 39% each year as estimated by the nine analysts watching the company. With the market only predicted to deliver 11% per year, the company is positioned for a stronger earnings result.

With this information, we can see why Dave & Buster's Entertainment is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Dave & Buster's Entertainment's P/E

Dave & Buster's Entertainment's P/E hasn't come down all the way after its stock plunged. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Dave & Buster's Entertainment's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

Plus, you should also learn about these 3 warning signs we've spotted with Dave & Buster's Entertainment (including 1 which shouldn't be ignored).

You might be able to find a better investment than Dave & Buster's Entertainment. 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.