Donnelley Financial Solutions, Inc.'s (NYSE:DFIN) price-to-earnings (or "P/E") ratio of 20.9x might make it look like a sell right now compared to the market in the United States, where around half of the companies have P/E ratios below 16x and even P/E's below 9x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.
Recent times haven't been advantageous for Donnelley Financial Solutions as its earnings have been falling quicker than most other companies. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.
View our latest analysis for Donnelley Financial Solutions
How Is Donnelley Financial Solutions' Growth Trending?
There's an inherent assumption that a company should outperform the market for P/E ratios like Donnelley Financial Solutions' to be considered reasonable.
Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 24%. Still, the latest three year period has seen an excellent 471% overall rise in EPS, in spite of its unsatisfying short-term performance. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.
Looking ahead now, EPS is anticipated to climb by 6.8% during the coming year according to the four analysts following the company. That's shaping up to be materially lower than the 9.9% growth forecast for the broader market.
In light of this, it's alarming that Donnelley Financial Solutions' P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.
What We Can Learn From Donnelley Financial Solutions' P/E?
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 Donnelley Financial Solutions currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.
Having said that, be aware Donnelley Financial Solutions is showing 2 warning signs in our investment analysis, you should know about.
Of course, you might also be able to find a better stock than Donnelley Financial Solutions. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.
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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.