Dufu Technology Corp. Berhad (KLSE:DUFU) Stock Rockets 28% As Investors Are Less Pessimistic Than Expected

Dufu Technology Corp. Berhad (KLSE:DUFU) shares have had a really impressive month, gaining 28% after a shaky period beforehand. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 26% in the last twelve months.

After such a large jump in price, given close to half the companies in Malaysia have price-to-earnings ratios (or "P/E's") below 14x, you may consider Dufu Technology Berhad as a stock to avoid entirely with its 38.3x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

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As an illustration, earnings have deteriorated at Dufu Technology Berhad over the last year, which is not ideal at all. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Dufu Technology Berhad

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

Is There Enough Growth For Dufu Technology Berhad?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Dufu Technology Berhad's 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 16%. As a result, earnings from three years ago have also fallen 77% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Comparing that to the market, which is predicted to deliver 17% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

In light of this, it's alarming that Dufu Technology Berhad's P/E sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

What We Can Learn From Dufu Technology Berhad's P/E?

Dufu Technology Berhad's P/E is flying high just like its stock has during the last month. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Dufu Technology Berhad currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. 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.

It is also worth noting that we have found 2 warning signs for Dufu Technology Berhad that you need to take into consideration.

If you're unsure about the strength of Dufu Technology Berhad'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.