DexCom, Inc.'s (NASDAQ:DXCM) Price In Tune With Earnings

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 18x, you may consider DexCom, Inc. (NASDAQ:DXCM) as a stock to avoid entirely with its 43.5x 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 lofty.

DexCom certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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How Is DexCom's Growth Trending?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 85% last year. The latest three year period has also seen a 14% overall rise in EPS, aided extensively by its short-term performance. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Turning to the outlook, the next three years should generate growth of 16% per annum as estimated by the analysts watching the company. With the market only predicted to deliver 10% per year, the company is positioned for a stronger earnings result.

In light of this, it's understandable that DexCom's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that DexCom maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

Before you take the next step, you should know about the 2 warning signs for DexCom that we have uncovered.

You might be able to find a better investment than DexCom. 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.