Dareway Software Co.,Ltd.'s (SHSE:688579) 27% Dip Still Leaving Some Shareholders Feeling Restless Over Its P/ERatio

Dareway Software Co.,Ltd. (SHSE:688579) shares have had a horrible month, losing 27% after a relatively good period beforehand. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 23% in that time.

Although its price has dipped substantially, Dareway SoftwareLtd may still be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 41.3x, since almost half of all companies in China have P/E ratios under 33x and even P/E's lower than 19x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

The earnings growth achieved at Dareway SoftwareLtd over the last year would be more than acceptable for most companies. It might be that many expect the respectable earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders may be a little nervous about the viability of the share price.

See our latest analysis for Dareway SoftwareLtd

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Dareway SoftwareLtd will help you shine a light on its historical performance.

Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as high as Dareway SoftwareLtd's is when the company's growth is on track to outshine the market.

If we review the last year of earnings growth, the company posted a terrific increase of 18%. However, this wasn't enough as the latest three year period has seen a very unpleasant 28% drop in EPS in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

In contrast to the company, the rest of the market is expected to grow by 38% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

With this information, we find it concerning that Dareway SoftwareLtd is trading at a P/E higher than the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Final Word

Dareway SoftwareLtd's P/E hasn't come down all the way after its stock plunged. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

Our examination of Dareway SoftwareLtd revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You need to take note of risks, for example - Dareway SoftwareLtd has 2 warning signs (and 1 which is potentially serious) we think you should know about.

If you're unsure about the strength of Dareway SoftwareLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.