Donnelley Financial Solutions, Inc.'s (NYSE:DFIN) Share Price Not Quite Adding Up

With a price-to-earnings (or "P/E") ratio of 21.6x Donnelley Financial Solutions, Inc. (NYSE:DFIN) may be sending bearish signals at the moment, given that almost half of all companies in the United States have P/E ratios under 16x and even P/E's lower than 9x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Recent times haven't been advantageous for Donnelley Financial Solutions as its earnings have been falling quicker than most other companies. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. If not, then existing shareholders may be very nervous about the viability of the share price.

See our latest analysis for Donnelley Financial Solutions

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Donnelley Financial Solutions.

How Is Donnelley Financial Solutions' Growth Trending?

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

Retrospectively, the last year delivered a frustrating 24% decrease to the company's bottom line. Even so, admirably EPS has lifted 471% in aggregate from three years ago, notwithstanding the last 12 months. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Turning to the outlook, the next year should generate growth of 6.8% as estimated by the four analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 10%, which is noticeably more attractive.

With this information, we find it concerning that Donnelley Financial Solutions is trading at a P/E higher than the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Final Word

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 Donnelley Financial Solutions currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Plus, you should also learn about these 2 warning signs we've spotted with Donnelley Financial Solutions.

Of course, you might also be able to find a better stock than Donnelley Financial Solutions. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.