Benign Growth For REDtone Digital Berhad (KLSE:REDTONE) Underpins Stock's 26% Plummet

To the annoyance of some shareholders, REDtone Digital Berhad (KLSE:REDTONE) shares are down a considerable 26% in the last month, which continues a horrid run for the company. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 44% in that time.

Even after such a large drop in price, REDtone Digital Berhad's price-to-earnings (or "P/E") ratio of 6.6x might still make it look like a strong buy right now compared to the market in Malaysia, where around half of the companies have P/E ratios above 15x and even P/E's above 25x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

REDtone Digital Berhad certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If you 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.

Check out our latest analysis for REDtone Digital Berhad

If you'd like to see what analysts are forecasting going forward, you should check out our free report on REDtone Digital Berhad.

Is There Any Growth For REDtone Digital Berhad?

The only time you'd be truly comfortable seeing a P/E as depressed as REDtone Digital Berhad's is when the company's growth is on track to lag the market decidedly.

Taking a look back first, we see that the company grew earnings per share by an impressive 76% last year. Pleasingly, EPS has also lifted 97% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the lone analyst covering the company suggest earnings growth is heading into negative territory, declining 1.6% per annum over the next three years. With the market predicted to deliver 9.7% growth per year, that's a disappointing outcome.

With this information, we are not surprised that REDtone Digital Berhad is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Bottom Line On REDtone Digital Berhad's P/E

Shares in REDtone Digital Berhad have plummeted and its P/E is now low enough to touch the ground. 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.

We've established that REDtone Digital Berhad maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

Plus, you should also learn about these 3 warning signs we've spotted with REDtone Digital Berhad (including 1 which is potentially serious).

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.