AYO Technology Solutions Limited (JSE:AYO) Might Not Be As Mispriced As It Looks After Plunging 36%

AYO Technology Solutions Limited (JSE:AYO) shareholders won't be pleased to see that the share price has had a very rough month, dropping 36% and undoing the prior period's positive performance. Longer-term, the stock has been solid despite a difficult 30 days, gaining 11% in the last year.

Although its price has dipped substantially, AYO Technology Solutions' price-to-earnings (or "P/E") ratio of -2.8x might still make it look like a strong buy right now compared to the market in South Africa, where around half of the companies have P/E ratios above 9x and even P/E's above 14x are quite common. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

For instance, AYO Technology Solutions' receding earnings in recent times would have to be some food for thought. One possibility is that the P/E is low because investors think the company won't do enough to avoid underperforming the broader market in the near future. 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.

View our latest analysis for AYO Technology Solutions

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

How Is AYO Technology Solutions' Growth Trending?

AYO Technology Solutions' P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.

Retrospectively, the last year delivered a frustrating 45% decrease to the company's bottom line. At least EPS has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Comparing that to the market, which is predicted to shrink 2.2% in the next 12 months, the company's positive momentum based on recent medium-term earnings results is a bright spot for the moment.

In light of this, it's quite peculiar that AYO Technology Solutions' P/E sits below the majority of other companies. It looks like most investors are not convinced at all that the company can maintain its recent positive growth rate in the face of a shrinking broader market.

The Key Takeaway

Having almost fallen off a cliff, AYO Technology Solutions' share price has pulled its P/E way down as well. 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 AYO Technology Solutions revealed its growing earnings over the medium-term aren't contributing to its P/E anywhere near as much as we would have predicted, given the market is set to shrink. We think potential risks might be placing significant pressure on the P/E ratio and share price. One major risk is whether its earnings trajectory can keep outperforming under these tough market conditions. At least the risk of a price drop looks to be subdued, but investors think future earnings could see a lot of volatility.

We don't want to rain on the parade too much, but we did also find 4 warning signs for AYO Technology Solutions (3 make us uncomfortable!) that you need to be mindful of.

If you're unsure about the strength of AYO Technology Solutions' 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.