With Dolby Laboratories, Inc. (NYSE:DLB) It Looks Like You'll Get What You Pay For

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 16x, you may consider Dolby Laboratories, Inc. (NYSE:DLB) as a stock to avoid entirely with its 40.6x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Dolby Laboratories certainly has been doing a good job lately as it's been growing earnings more than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Dolby Laboratories

Keen to find out how analysts think Dolby Laboratories' future stacks up against the industry? In that case, our free report is a great place to start.

How Is Dolby Laboratories' Growth Trending?

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

Taking a look back first, we see that the company managed to grow earnings per share by a handy 14% last year. Ultimately though, it couldn't turn around the poor performance of the prior period, with EPS shrinking 8.3% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 16% each year during the coming three years according to the three analysts following the company. With the market only predicted to deliver 13% per annum, the company is positioned for a stronger earnings result.

With this information, we can see why Dolby Laboratories is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Dolby Laboratories' P/E

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 Dolby Laboratories' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

Many other vital risk factors can be found on the company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Dolby Laboratories with six simple checks.

If these risks are making you reconsider your opinion on Dolby Laboratories, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.