A Sliding Share Price Has Us Looking At REDtone International Berhad’s (KLSE:REDTONE) P/E Ratio

To the annoyance of some shareholders, REDtone International Berhad (KLSE:REDTONE) shares are down a considerable 57% in the last month. The recent drop has obliterated the annual return, with the share price now down 27% over that longer period.

All else being equal, a share price drop should make a stock more attractive to potential investors. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. So, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.

Check out our latest analysis for REDtone International Berhad

Does REDtone International Berhad Have A Relatively High Or Low P/E For Its Industry?

REDtone International Berhad’s P/E of 8.62 indicates relatively low sentiment towards the stock. The image below shows that REDtone International Berhad has a lower P/E than the average (14.6) P/E for companies in the telecom industry.

Its relatively low P/E ratio indicates that REDtone International Berhad shareholders think it will struggle to do as well as other companies in its industry classification. Many investors like to buy stocks when the market is pessimistic about their prospects. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.

How Growth Rates Impact P/E Ratios

Generally speaking the rate of earnings growth has a profound impact on a company’s P/E multiple. When earnings grow, the ‘E’ increases, over time. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.

REDtone International Berhad’s 174% EPS improvement over the last year was like bamboo growth after rain; rapid and impressive. The sweetener is that the annual five year growth rate of 15% is also impressive. So I’d be surprised if the P/E ratio was not above average.

Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits

Don’t forget that the P/E ratio considers market capitalization. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).

Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.

How Does REDtone International Berhad’s Debt Impact Its P/E Ratio?

REDtone International Berhad has net cash of RM67m. This is fairly high at 42% of its market capitalization. That might mean balance sheet strength is important to the business, but should also help push the P/E a bit higher than it would otherwise be.

The Bottom Line On REDtone International Berhad’s P/E Ratio

REDtone International Berhad trades on a P/E ratio of 8.6, which is below the MY market average of 9.9. The net cash position gives plenty of options to the business, and the recent improvement in EPS is good to see. One might conclude that the market is a bit pessimistic, given the low P/E ratio. What can be absolutely certain is that the market has become more pessimistic about REDtone International Berhad over the last month, with the P/E ratio falling from 20.0 back then to 8.6 today. For those who prefer invest in growth, this stock apparently offers limited promise, but the deep value investors may find the pessimism around this stock enticing.

Investors should be looking to buy stocks that the market is wrong about. As value investor Benjamin Graham famously said, ‘In the short run, the market is a voting machine but in the long run, it is a weighing machine. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.

Of course you might be able to find a better stock than REDtone International Berhad. So you may wish to see this free collection of other companies that have grown earnings strongly.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.

These great dividend stocks are beating your savings account

Not only have these stocks been reliable dividend payers for the last 10 years but with the yield over 3% they are also easily beating your savings account (let alone the possible capital gains). Click here to see them for FREE on Simply Wall St.