DermTech, Inc. (NASDAQ:DMTK) Not Doing Enough For Some Investors As Its Shares Slump 37%

Unfortunately for some shareholders, the DermTech, Inc. (NASDAQ:DMTK) share price has dived 37% in the last thirty days, prolonging recent pain. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 70% loss during that time.

After such a large drop in price, DermTech may be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of -0.6x, since almost half of all companies in the United States have P/E ratios greater than 15x and even P/E's higher than 29x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

DermTech hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

View our latest analysis for DermTech

If you'd like to see what analysts are forecasting going forward, you should check out our free report on DermTech.

Does Growth Match The Low P/E?

DermTech's 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.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 23%. At least EPS has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Shifting to the future, estimates from the six analysts covering the company suggest earnings should grow by 7.5% per annum over the next three years. With the market predicted to deliver 11% growth per year, the company is positioned for a weaker earnings result.

With this information, we can see why DermTech is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Final Word

DermTech's P/E looks about as weak as its stock price lately. 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.

As we suspected, our examination of DermTech's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 6 warning signs with DermTech (at least 2 which are concerning), and understanding these should be part of your investment process.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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