Some shareholders feel worried about Dollar General Corporation’s P / E ratio (NYSE: DG)

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Dollar General Corporation’s (NYSE: DG) A price-to-earnings (or “P / E”) ratio of 21.4x could make it look like a sell-off right now relative to the US market, where about half of the companies have P / E ratios below 17x and even P / E below 10x are quite common. Still, we’ll need to dig a little deeper to determine if there is a rational basis for the high P / E.

Dollar General could do better because its profits have grown less than most other companies lately. Many may expect interest-free earnings performance to pick up significantly, which has kept the P / E from collapsing. If not, existing shareholders may be very concerned about the viability of the share price.

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Does growth match high P / E?

There is an inherent assumption that a company would have to outperform the market for P / E ratios like that of Dollar General to be considered reasonable.

In retrospect, last year generated a decent 14% gain in the company’s bottom line. This was supported by an excellent period before seeing BPA increase by 63% overall over the past three years. As a result, shareholders would likely have welcomed these earnings growth rates over the medium term.

As for the outlook, the next three years are expected to generate 7.2% growth each year, according to estimates from analysts watching the company. Meanwhile, the rest of the market is expected to grow by 12% per year, which is definitely more attractive.

In light of this, it is alarming that Dollar General’s P / E is above the majority of other companies. It appears most investors are hoping for a turnaround in the company’s business outlook, but the analyst cohort is not so confident that will happen. Only the more daring would assume that these prices are sustainable as this level of earnings growth is likely to weigh heavily on the futures price.

The last word

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

Our review of Dollar General’s analyst forecast revealed that its lower earnings outlook is not affecting its high P / E as much as we would have expected. Right now, we are increasingly uncomfortable with the high P / E, as expected future earnings are unlikely to sustain such positive sentiment for long. This exposes shareholders’ investments to significant risk and potential investors risk paying an excessive premium.

And what about other risks? Every business has them, and we’ve spotted 1 warning sign for Dollar General you should know.

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

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

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