MotorCycle Holdings Limited's (ASX:MTO) Shares Leap 26% Yet They're Still Not Telling The Full Story

MotorCycle Holdings Limited (ASX:MTO) shares have had a really impressive month, gaining 26% after a shaky period beforehand. The annual gain comes to 129% following the latest surge, making investors sit up and take notice.

Even after such a large jump in price, MotorCycle Holdings' price-to-earnings (or "P/E") ratio of 15.4x 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 22x and even P/E's above 40x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

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With earnings growth that's superior to most other companies of late, MotorCycle Holdings has been doing relatively well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If you 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.

Check out our latest analysis for MotorCycle Holdings

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

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, we see that the company grew earnings per share by an impressive 27% last year. However, this wasn't enough as the latest three year period has seen a very unpleasant 35% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the two analysts covering the company suggest earnings should grow by 17% per annum over the next three years. With the market predicted to deliver 18% growth each year, the company is positioned for a comparable earnings result.

In light of this, it's peculiar that MotorCycle Holdings' P/E sits below the majority of other companies. Apparently some shareholders are doubtful of the forecasts and have been accepting lower selling prices.

What We Can Learn From MotorCycle Holdings' P/E?

MotorCycle Holdings' stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. 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.

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.

You should always think about risks. Case in point, we've spotted 2 warning signs for MotorCycle Holdings you should be aware of.

You might be able to find a better investment than MotorCycle Holdings. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.