Earnings Working Against Dorian LPG Ltd.'s (NYSE:LPG) Share Price

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 18x, you may consider Dorian LPG Ltd. (NYSE:LPG) as a highly attractive investment with its 6.1x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

With its earnings growth in positive territory compared to the declining earnings of most other companies, DorianG has been doing quite well of late. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for DorianG

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Is There Any Growth For DorianG?

The only time you'd be truly comfortable seeing a P/E as depressed as DorianG's is when the company's growth is on track to lag the market decidedly.

Retrospectively, the last year delivered an exceptional 77% gain to the company's bottom line. Pleasingly, EPS has also lifted 307% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to slump, contracting by 21% per annum during the coming three years according to the three analysts following the company. That's not great when the rest of the market is expected to grow by 10.0% each year.

With this information, we are not surprised that DorianG is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

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.

We've established that DorianG maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. 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 - DorianG has 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

If you're unsure about the strength of DorianG's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.