Macquarie Technology Group Limited's (ASX:MAQ) Business Is Yet to Catch Up With Its Share Price

When close to half the companies in Australia have price-to-earnings ratios (or "P/E's") below 17x, you may consider Macquarie Technology Group Limited (ASX:MAQ) as a stock to avoid entirely with its 42.8x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

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Recent times have been advantageous for Macquarie Technology Group 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Macquarie Technology Group

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

Is There Enough Growth For Macquarie Technology Group?

In order to justify its P/E ratio, Macquarie Technology Group would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered an exceptional 38% gain to the company's bottom line. Pleasingly, EPS has also lifted 228% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the eight analysts covering the company suggest earnings growth is heading into negative territory, declining 2.8% per year over the next three years. With the market predicted to deliver 15% growth each year, that's a disappointing outcome.

In light of this, it's alarming that Macquarie Technology Group's P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as these declining earnings are likely to weigh heavily on the share price eventually.

The Final Word

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.

Our examination of Macquarie Technology Group's analyst forecasts revealed that its outlook for shrinking earnings isn't impacting its high P/E anywhere near as much as we would have predicted. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings are highly unlikely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Macquarie Technology Group, and understanding these should be part of your investment process.

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.

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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.