Mahamaya Steel Industries Limited (NSE:MAHASTEEL) Not Lagging Market On Growth Or Pricing

Mahamaya Steel Industries Limited's (NSE:MAHASTEEL) price-to-earnings (or "P/E") ratio of 58.7x might make it look like a strong sell right now compared to the market in India, where around half of the companies have P/E ratios below 14x and even P/E's below 7x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

As an illustration, earnings have deteriorated at Mahamaya Steel Industries over the last year, which is not ideal at all. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.

Check out our latest analysis for Mahamaya Steel Industries

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 Mahamaya Steel Industries' earnings, revenue and cash flow.

What Are Growth Metrics Telling Us About The High P/E?

In order to justify its P/E ratio, Mahamaya Steel Industries would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered a frustrating 58% decrease to the company's bottom line. Still, the latest three year period has seen an excellent 95% overall rise in EPS, in spite of its unsatisfying short-term performance. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

This is in contrast to the rest of the market, which is expected to grow by 3.5% over the next year, materially lower than the company's recent medium-term annualised growth rates.

With this information, we can see why Mahamaya Steel Industries is trading at such a high P/E compared to the market. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

The Final Word

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Mahamaya Steel Industries revealed its three-year earnings trends are contributing to its high P/E, given they look better than current market expectations. Right now shareholders are comfortable with the P/E as they are quite confident earnings aren't under threat. If recent medium-term earnings trends continue, it's hard to see the share price falling strongly in the near future under these circumstances.

There are also other vital risk factors to consider and we've discovered 4 warning signs for Mahamaya Steel Industries (1 can't be ignored!) that you should be aware of before investing here.

Of course, you might also be able to find a better stock than Mahamaya Steel Industries. So you may wish to see this free collection of other companies that sit on P/E's below 20x and have grown earnings strongly.

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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. 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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