Even With A 28% Surge, Cautious Investors Are Not Rewarding MotorCycle Holdings Limited's (ASX:MTO) Performance Completely

MotorCycle Holdings Limited (ASX:MTO) shares have continued their recent momentum with a 28% gain in the last month alone. The annual gain comes to 170% following the latest surge, making investors sit up and take notice.

Even after such a large jump in price, given about half the companies in Australia have price-to-earnings ratios (or "P/E's") above 19x, you may still consider MotorCycle Holdings as an attractive investment with its 13.9x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

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While the market has experienced earnings growth lately, MotorCycle Holdings' earnings have gone into reverse gear, which is not great. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If you still like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

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How Is MotorCycle Holdings' Growth Trending?

There's an inherent assumption that a company should underperform the market for P/E ratios like MotorCycle Holdings' to be considered reasonable.

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 11%. This means it has also seen a slide in earnings over the longer-term as EPS is down 40% in total over the last three years. So unfortunately, we have to acknowledge that the company has not 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 13% per annum over the next three years. With the market predicted to deliver 15% growth per annum, the company is positioned for a comparable earnings result.

With this information, we find it odd that MotorCycle Holdings is trading at a P/E lower than the market. It may be that most investors are not convinced the company can achieve future growth expectations.

The Bottom Line On MotorCycle Holdings' P/E

Despite MotorCycle Holdings' shares building up a head of steam, its P/E still lags most other companies. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that MotorCycle Holdings currently trades on a lower than expected P/E since its forecast growth is in line with the wider market. 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. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

We don't want to rain on the parade too much, but we did also find 1 warning sign for MotorCycle Holdings that you need to be mindful of.

Of course, you might also be able to find a better stock than MotorCycle Holdings. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.