Destination XL Group, Inc.'s (NASDAQ:DXLG) Shares Lagging The Market But So Is The Business

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 17x, you may consider Destination XL Group, Inc. (NASDAQ:DXLG) as a highly attractive investment with its 7.1x 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.

Destination XL Group has been struggling lately as its earnings have declined faster than most other companies. It seems that many are expecting the dismal earnings performance to persist, which has repressed the P/E. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. Or at the very least, you'd be hoping the earnings slide doesn't get any worse if your plan is to pick up some stock while it's out of favour.

Check out our latest analysis for Destination XL Group

Want the full picture on analyst estimates for the company? Then our free report on Destination XL Group will help you uncover what's on the horizon.

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

In order to justify its P/E ratio, Destination XL Group would need to produce anemic growth that's substantially trailing the market.

Retrospectively, the last year delivered a frustrating 68% decrease to the company's bottom line. At least EPS has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Turning to the outlook, the next three years should generate growth of 1.1% per year as estimated by the dual analysts watching the company. With the market predicted to deliver 10% growth per annum, the company is positioned for a weaker earnings result.

In light of this, it's understandable that Destination XL Group's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Key Takeaway

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Destination XL Group maintains its low P/E on the weakness of its forecast growth being lower than the wider market, 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.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Destination XL Group that you should be aware of.

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 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.