What Is Mahamaya Steel Industries's (NSE:MAHASTEEL) P/E Ratio After Its Share Price Rocketed?

Mahamaya Steel Industries (NSE:MAHASTEEL) shares have had a really impressive month, gaining 35%, after some slippage. However, that doesn't change the fact that longer term shareholders might have been mercilessly wrecked by the 57% share price decline throughout the year.

Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. 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 some would prefer to hold off buying when there is a lot of optimism towards a stock. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). A high P/E implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.

Check out our latest analysis for Mahamaya Steel Industries

Does Mahamaya Steel Industries Have A Relatively High Or Low P/E For Its Industry?

Mahamaya Steel Industries's P/E of 30.50 indicates some degree of optimism towards the stock. As you can see below, Mahamaya Steel Industries has a much higher P/E than the average company (8.2) in the metals and mining industry.

Mahamaya Steel Industries's P/E tells us that market participants think the company will perform better than its industry peers, going forward. The market is optimistic about the future, but that doesn't guarantee future growth. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

How Growth Rates Impact P/E Ratios

Probably the most important factor in determining what P/E a company trades on is the earnings growth. When earnings grow, the 'E' increases, over time. That means unless the share price increases, the P/E will reduce in a few years. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Mahamaya Steel Industries shrunk earnings per share by 23% over the last year. But over the longer term (5 years) earnings per share have increased by 7.8%.

Remember: P/E Ratios Don't Consider The Balance Sheet

Don't forget that the P/E ratio considers market capitalization. That means it doesn't take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

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.

Mahamaya Steel Industries's Balance Sheet

Mahamaya Steel Industries has net debt worth 57% of its market capitalization. If you want to compare its P/E ratio to other companies, you should absolutely keep in mind it has significant borrowings.

The Bottom Line On Mahamaya Steel Industries's P/E Ratio

Mahamaya Steel Industries has a P/E of 30.5. That's higher than the average in its market, which is 10.9. With meaningful debt and a lack of recent earnings growth, the market has high expectations that the business will earn more in the future. What we know for sure is that investors have become much more excited about Mahamaya Steel Industries recently, since they have pushed its P/E ratio from 22.5 to 30.5 over the last month. For those who prefer to invest with the flow of momentum, that might mean it's time to put the stock on a watchlist, or research it. But the contrarian may see it as a missed opportunity.

Investors have an opportunity when market expectations about a stock are wrong. 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. We don't have analyst forecasts, but you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.

Of course you might be able to find a better stock than Mahamaya Steel Industries. So you may wish to see this free collection of other companies that 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. Thank you for reading.