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Insufficient growth of DRA Global Limited (ASX:DRA) is hampering the share price

When nearly half of companies in Australia have price-to-earnings (or “P/E”) ratios above 18x, you might want to consider DRA Global Limited (ASX:DRA) as a very attractive investment with its P/E ratio of 2.9x. Nevertheless, we would need to dig a little deeper to determine if there is a rational basis for the sharply reduced P/E.

With extremely strong earnings growth lately, DRA Global is doing very well. One possibility is that the P/E is low because investors believe this strong earnings growth may actually underperform the market in the near future. If that doesn’t happen, existing shareholders have reason to be quite optimistic about the future direction of the stock price.

Check out our latest analysis for DRA Global

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Want a complete picture of company profits, revenue, and cash flow? Then our free report on DRA Global will help you shed light on its historical performance.

What is the growth trend of DRA Global?

The only time you’d be really comfortable seeing a P/E as depressed as DRA Global’s is when the company’s growth is about to lag the market decisively.

Looking back first, we see that the company increased its earnings per share by 213% last year. However, its longer-term performance has not been as strong, with three-year EPS growth being relatively non-existent overall. As a result, shareholders would probably not have been too pleased with the unstable medium-term growth rates.

This contrasts with the rest of the market, which is expected to grow 20% over the next year, significantly higher than the company’s recent medium-term annualized growth rates.

In light of this, it is understandable that DRA Global’s P/E is below the majority of other companies. Apparently, many shareholders were uncomfortable hanging on to something that they believe will continue to follow the stock market.

The Key Takeaway

It’s not a good idea to use the price-earnings ratio alone to determine whether you should sell your shares, but it can be a handy guide to the company’s future prospects.

We have established that DRA Global maintains its low P/E on the weakness of its recent three-year growth being below broader market expectations, as expected. At present, shareholders accept the low P/E as they concede that future earnings are unlikely to provide any positive surprises. If recent mid-term earnings trends continue, it is difficult to see the stock price rising significantly in the near future under these circumstances.

Before proceeding to the next step, you must know the 2 warning signs for DRA Global that we discovered.

Sure, you might also be able to find better stock than DRA Global. So you might want to see this free collection of other companies with P/Es less than 20x and strong earnings growth.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.