Destination XL Group, Inc. (NASDAQ:DXLG) Shares Fly 33% But Investors Aren't Buying For Growth

Destination XL Group, Inc. (NASDAQ:DXLG) shares have had a really impressive month, gaining 33% after a shaky period beforehand. Unfortunately, despite the strong performance over the last month, the full year gain of 3.9% isn't as attractive.

Although its price has surged higher, given close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 16x, you may still consider Destination XL Group as a highly attractive investment with its 3.7x 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 limited.

Recent times have been advantageous for Destination XL Group 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 not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Destination XL Group

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Destination XL Group.

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

Destination XL Group's P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.

Retrospectively, the last year delivered an exceptional 309% gain to the company's bottom line. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Looking ahead now, EPS is anticipated to slump, contracting by 25% each year during the coming three years according to the twin analysts following the company. That's not great when the rest of the market is expected to grow by 9.8% per year.

In light of this, it's understandable that Destination XL Group's P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

What We Can Learn From Destination XL Group's P/E?

Even after such a strong price move, Destination XL Group's P/E still trails the rest of the market significantly. 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 Destination XL Group's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Destination XL Group you should know about.

You might be able to find a better investment than Destination XL Group. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (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.