Theta Edge Berhad's (KLSE:THETA) 28% Share Price Plunge Could Signal Some Risk

The Theta Edge Berhad (KLSE:THETA) share price has softened a substantial 28% over the previous 30 days, handing back much of the gains the stock has made lately. Of course, over the longer-term many would still wish they owned shares as the stock's price has soared 243% in the last twelve months.

In spite of the heavy fall in price, Theta Edge Berhad's price-to-earnings (or "P/E") ratio of 42x might still make it look like a strong sell right now compared to the market in Malaysia, where around half of the companies have P/E ratios below 17x and even P/E's below 10x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

Earnings have risen firmly for Theta Edge Berhad recently, which is pleasing to see. 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Theta Edge Berhad

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Theta Edge Berhad's earnings, revenue and cash flow.

Is There Enough Growth For Theta Edge Berhad?

In order to justify its P/E ratio, Theta Edge Berhad would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered an exceptional 26% gain to the company's bottom line. Still, EPS has barely risen at all from three years ago in total, which is not ideal. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Comparing that to the market, which is predicted to deliver 18% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

In light of this, it's alarming that Theta Edge Berhad's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Key Takeaway

A significant share price dive has done very little to deflate Theta Edge Berhad's very lofty P/E. 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 Theta Edge Berhad revealed its three-year earnings trends aren't impacting its high P/E anywhere near as much as we would have predicted, given they look worse than current market expectations. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Plus, you should also learn about these 3 warning signs we've spotted with Theta Edge Berhad (including 2 which don't sit too well with us).

If you're unsure about the strength of Theta Edge 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.