DataDot Technology Limited (ASX:DDT) Shares May Have Slumped 33% But Getting In Cheap Is Still Unlikely

To the annoyance of some shareholders, DataDot Technology Limited (ASX:DDT) shares are down a considerable 33% in the last month, which continues a horrid run for the company. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 60% loss during that time.

Although its price has dipped substantially, DataDot Technology's price-to-earnings (or "P/E") ratio of 22x might still make it look like a sell right now compared to the market in Australia, where around half of the companies have P/E ratios below 16x and even P/E's below 8x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's lofty.

DataDot Technology certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. The P/E is probably high because investors think this strong earnings growth will be 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 DataDot Technology

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

Is There Enough Growth For DataDot Technology?

The only time you'd be truly comfortable seeing a P/E as high as DataDot Technology's is when the company's growth is on track to outshine the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 431% last year. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 17% shows it's noticeably less attractive on an annualised basis.

With this information, we find it concerning that DataDot Technology is trading at a P/E higher than the market. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Bottom Line On DataDot Technology's P/E

DataDot Technology's P/E hasn't come down all the way after its stock plunged. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

Our examination of DataDot Technology revealed its three-year earnings trends aren't impacting its high P/E anywhere near as much as we would have predicted, given they look worse than current market expectations. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

You need to take note of risks, for example - DataDot Technology has 4 warning signs (and 2 which shouldn't be ignored) we think you should know about.

If P/E ratios interest you, you may wish to see this free collection of other companies that have grown earnings strongly and trade on P/E's below 20x.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

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