DFI Inc. (TWSE:2397) shares have had a horrible month, losing 31% after a relatively good period beforehand. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 14% in that time.
Although its price has dipped substantially, given around half the companies in Taiwan have price-to-earnings ratios (or "P/E's") below 20x, you may still consider DFI as a stock to potentially avoid with its 23.2x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.
As an illustration, earnings have deteriorated at DFI 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 DFI
What Are Growth Metrics Telling Us About The High P/E?
There's an inherent assumption that a company should outperform the market for P/E ratios like DFI's to be considered reasonable.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 55%. The last three years don't look nice either as the company has shrunk EPS by 9.3% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.
Comparing that to the market, which is predicted to deliver 24% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.
With this information, we find it concerning that DFI is trading at a P/E higher than the market. 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 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 DFI's P/E?
DFI's P/E hasn't come down all the way after its stock plunged. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
Our examination of DFI revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.
It is also worth noting that we have found 4 warning signs for DFI (2 shouldn't be ignored!) that you need to take into consideration.
It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).
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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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com
About TWSE:2397
DFI
Designs, manufactures, and sells board and system-level products for embedded applications worldwide.
Excellent balance sheet second-rate dividend payer.
