Mayfield Group Holdings Limited's (ASX:MYG) P/E Is Still On The Mark Following 30% Share Price Bounce

Mayfield Group Holdings Limited (ASX:MYG) shares have continued their recent momentum with a 30% gain in the last month alone. The annual gain comes to 152% following the latest surge, making investors sit up and take notice.

Following the firm bounce in price, Mayfield Group Holdings' price-to-earnings (or "P/E") ratio of 27.4x might make it look like a sell right now compared to the market in Australia, where around half of the companies have P/E ratios below 22x and even P/E's below 12x are quite common. 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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Recent times have been advantageous for Mayfield Group Holdings as its earnings have been rising faster than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Mayfield Group Holdings

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

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

The only time you'd be truly comfortable seeing a P/E as high as Mayfield Group Holdings' is when the company's growth is on track to outshine the market.

Retrospectively, the last year delivered an exceptional 28% gain to the company's bottom line. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Turning to the outlook, the next three years should generate growth of 23% each year as estimated by the sole analyst watching the company. With the market only predicted to deliver 19% each year, the company is positioned for a stronger earnings result.

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

The Final Word

The large bounce in Mayfield Group Holdings' shares has lifted the company's P/E to a fairly high level. 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 Mayfield Group Holdings' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

You always need to take note of risks, for example - Mayfield Group Holdings has 1 warning sign we think you should be aware of.

If you're unsure about the strength of Mayfield Group Holdings' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.