Investors Still Aren't Entirely Convinced By Macmahon Holdings Limited's (ASX:MAH) Earnings Despite 37% Price Jump

Despite an already strong run, Macmahon Holdings Limited (ASX:MAH) shares have been powering on, with a gain of 37% in the last thirty days. The last 30 days bring the annual gain to a very sharp 30%.

Even after such a large jump in price, Macmahon Holdings' price-to-earnings (or "P/E") ratio of 11.7x might still make it look like a buy right now compared to the market in Australia, where around half of the companies have P/E ratios above 19x and even P/E's above 38x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Trump has pledged to "unleash" American oil and gas and these 15 US stocks have developments that are poised to benefit.

With earnings growth that's superior to most other companies of late, Macmahon Holdings has been doing relatively well. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Macmahon Holdings

Keen to find out how analysts think Macmahon Holdings' future stacks up against the industry? In that case, our free report is a great place to start.

Does Growth Match The Low P/E?

Macmahon Holdings' P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 37% last year. Pleasingly, EPS has also lifted 168% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Shifting to the future, estimates from the three analysts covering the company suggest earnings should grow by 16% each year over the next three years. That's shaping up to be similar to the 15% per annum growth forecast for the broader market.

With this information, we find it odd that Macmahon Holdings is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting lower selling prices.

The Key Takeaway

The latest share price surge wasn't enough to lift Macmahon Holdings' P/E close to the market median. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Macmahon Holdings' analyst forecasts revealed that its market-matching earnings outlook isn't contributing to its P/E as much as we would have predicted. When we see an average earnings outlook with market-like growth, we assume potential risks are what might be placing pressure on the P/E ratio. It appears some are indeed anticipating earnings instability, because these conditions should normally provide more support to the share price.

The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for Macmahon Holdings with six simple checks will allow you to discover any risks that could be an issue.

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.