D-BOX Technologies Inc.'s (TSE:DBO) 40% Share Price Surge Not Quite Adding Up

Despite an already strong run, D-BOX Technologies Inc. (TSE:DBO) shares have been powering on, with a gain of 40% in the last thirty days. The last 30 days were the cherry on top of the stock's 571% gain in the last year, which is nothing short of spectacular.

After such a large jump in price, given around half the companies in Canada have price-to-earnings ratios (or "P/E's") below 16x, you may consider D-BOX Technologies as a stock to potentially avoid with its 24x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

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With earnings growth that's exceedingly strong of late, D-BOX Technologies has been doing very well. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for D-BOX Technologies

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on D-BOX Technologies' earnings, revenue and cash flow.

How Is D-BOX Technologies' Growth Trending?

There's an inherent assumption that a company should outperform the market for P/E ratios like D-BOX Technologies' to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 356% 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. 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 deliver 24% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

In light of this, it's alarming that D-BOX Technologies' P/E sits above the majority of other companies. 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. 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 Key Takeaway

D-BOX Technologies shares have received a push in the right direction, but its P/E is elevated too. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that D-BOX Technologies currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. 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. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Plus, you should also learn about this 1 warning sign we've spotted with D-BOX Technologies.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on 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.