Dyna-Mac Holdings Ltd.'s (SGX:NO4) 27% Share Price Surge Not Quite Adding Up

Dyna-Mac Holdings Ltd. (SGX:NO4) shareholders have had their patience rewarded with a 27% share price jump in the last month. Looking back a bit further, it's encouraging to see the stock is up 71% in the last year.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about Dyna-Mac Holdings' P/E ratio of 13.1x, since the median price-to-earnings (or "P/E") ratio in Singapore is also close to 12x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

Recent times have been advantageous for Dyna-Mac Holdings as its earnings have been rising faster than most other companies. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

View our latest analysis for Dyna-Mac Holdings

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

Does Growth Match The P/E?

The only time you'd be comfortable seeing a P/E like Dyna-Mac Holdings' is when the company's growth is tracking the market closely.

If we review the last year of earnings growth, the company posted a terrific increase of 183%. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Turning to the outlook, the next three years should generate growth of 7.3% per annum as estimated by the sole analyst watching the company. That's shaping up to be materially lower than the 9.9% each year growth forecast for the broader market.

With this information, we find it interesting that Dyna-Mac Holdings is trading at a fairly similar P/E to the market. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

The Final Word

Its shares have lifted substantially and now Dyna-Mac Holdings' P/E is also back up to the market median. 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.

We've established that Dyna-Mac Holdings currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Dyna-Mac Holdings that you should be aware of.

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.