Investors Still Aren't Entirely Convinced By REDtone Digital Berhad's (KLSE:REDTONE) Earnings Despite 25% Price Jump

REDtone Digital Berhad (KLSE:REDTONE) shares have had a really impressive month, gaining 25% after a shaky period beforehand. Looking back a bit further, it's encouraging to see the stock is up 66% in the last year.

Although its price has surged higher, it's still not a stretch to say that REDtone Digital Berhad's price-to-earnings (or "P/E") ratio of 14.5x right now seems quite "middle-of-the-road" compared to the market in Malaysia, where the median P/E ratio is around 16x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

We'd have to say that with no tangible growth over the last year, REDtone Digital Berhad's earnings have been unimpressive. It might be that many expect the uninspiring earnings performance to only match most other companies at best over the coming period, which has kept the P/E from rising. 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 not quite in favour.

See our latest analysis for REDtone Digital Berhad

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

Is There Some Growth For REDtone Digital Berhad?

In order to justify its P/E ratio, REDtone Digital Berhad would need to produce growth that's similar to the market.

Retrospectively, the last year delivered virtually the same number to the company's bottom line as the year before. However, a few strong years before that means that it was still able to grow EPS by an impressive 1,010% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 15% shows it's noticeably more attractive on an annualised basis.

With this information, we find it interesting that REDtone Digital Berhad is trading at a fairly similar P/E to the market. It may be that most investors are not convinced the company can maintain its recent growth rates.

What We Can Learn From REDtone Digital Berhad's P/E?

REDtone Digital Berhad appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. 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.

Our examination of REDtone Digital Berhad revealed its three-year earnings trends aren't contributing to its P/E as much as we would have predicted, given they look better than current market expectations. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing pressure on the P/E ratio. At least the risk of a price drop looks to be subdued if recent medium-term earnings trends continue, but investors seem to think future earnings could see some volatility.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for REDtone Digital Berhad that you should be aware of.

If you're unsure about the strength of REDtone Digital 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.