With Domain Holdings Australia Limited (ASX:DHG), it looks like you’ll get what you pay for

With a price/earnings ratio (or “P/E”) of 59.2x Domain Holdings Australia Limited (ASX: DHG) may be sending very bearish signals at the moment, given that nearly half of all companies in Australia have P/E ratios below 14x and even P/Es below 8x are not unusual. Although it is not wise to take the P/E at face value as there may be an explanation why it is so high.

Domain Holdings Australia could do better as its profits have grown less than most other companies in recent times. Many may expect the uninspiring earnings performance to recover significantly, which has kept the P/E from crashing. You really hope so, otherwise you pay a pretty high price for no particular reason.

See our latest analysis for Domain Holdings Australia

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Want a full picture of analyst estimates for the business? Then our free report on Domain Holdings Australia will help you find out what’s on the horizon.

What do the growth indicators tell us about the high P/E?

In order to justify its P/E ratio, Domain Holdings Australia should produce exceptional growth well above the market.

Looking back, last year delivered virtually the same number to the company’s bottom line as the year before. The longer-term trend hasn’t been any better, as the company hasn’t seen any earnings growth in the past three years either. It therefore seems obvious to us that the company has struggled to increase its profits significantly during this period.

Looking ahead, estimates from analysts covering the company suggest earnings are expected to grow 43% annually for the next three years. With a market only expected to generate 13% each year, the company is positioned for a stronger earnings result.

In light of this, it’s understandable that Domain Holdings Australia’s P/E sits above the majority of other companies. Apparently shareholders don’t want to offload something that potentially looks to a more prosperous future.

The Basics on Domain Holdings Australia’s P/E

As a general rule, we prefer to limit the use of the price/earnings ratio to establishing what the market thinks of the overall health of a company.

As we suspected, our review of analyst forecasts for Domain Holdings Australia revealed that its better earnings outlook is contributing to its elevated P/E. At this point, investors believe the potential for earnings deterioration is not large enough to warrant a lower P/E ratio. It is difficult to see the share price falling sharply in the near future under these circumstances.

We don’t want to rain too much on the parade, but we also found 1 warning sign for Domain Holdings Australia which you must take into account.

It’s important to be sure to research a great company, not just the first idea you come across. So take a look at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20x).

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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