Market Cool On Dreamfolks Services Limited's (NSE:DREAMFOLKS) Earnings Pushing Shares 27% Lower

To the annoyance of some shareholders, Dreamfolks Services Limited (NSE:DREAMFOLKS) shares are down a considerable 27% in the last month, which continues a horrid run for the company. For any long-term shareholders, the last month ends a year to forget by locking in a 77% share price decline.

After such a large drop in price, given about half the companies in India have price-to-earnings ratios (or "P/E's") above 29x, you may consider Dreamfolks Services as a highly attractive investment with its 8.6x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

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Dreamfolks Services hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If you still like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

View our latest analysis for Dreamfolks Services

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

Is There Any Growth For Dreamfolks Services?

In order to justify its P/E ratio, Dreamfolks Services would need to produce anemic growth that's substantially trailing the market.

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 5.3%. Still, the latest three year period has seen an excellent 119% overall rise in EPS, in spite of its unsatisfying short-term performance. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Shifting to the future, estimates from the two analysts covering the company suggest earnings should grow by 35% over the next year. With the market only predicted to deliver 25%, the company is positioned for a stronger earnings result.

In light of this, it's peculiar that Dreamfolks Services' P/E sits below the majority of other companies. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

The Key Takeaway

Having almost fallen off a cliff, Dreamfolks Services' share price has pulled its P/E way down as well. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of Dreamfolks Services' analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E anywhere near as much as we would have predicted. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.

Before you take the next step, you should know about the 2 warning signs for Dreamfolks Services that we have uncovered.

If these risks are making you reconsider your opinion on Dreamfolks Services, 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.