MDA Space Ltd. (TSE:MDA) shares have retraced a considerable 29% in the last month, reversing a fair amount of their solid recent performance. Looking at the bigger picture, even after this poor month the stock is up 98% in the last year.
In spite of the heavy fall in price, given close to half the companies in Canada have price-to-earnings ratios (or "P/E's") below 16x, you may still consider MDA Space as a stock to avoid entirely with its 33.6x 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.
Recent times have been advantageous for MDA Space 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.
Check out our latest analysis for MDA Space
Does Growth Match The High P/E?
In order to justify its P/E ratio, MDA Space would need to produce outstanding growth well in excess of the market.
If we review the last year of earnings growth, the company posted a terrific increase of 137%. Pleasingly, EPS has also lifted 2,498% 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.
Turning to the outlook, the next three years should generate growth of 17% per annum as estimated by the seven analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 11% per annum, which is noticeably less attractive.
With this information, we can see why MDA Space is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.
The Key Takeaway
A significant share price dive has done very little to deflate MDA Space's very lofty P/E. 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.
As we suspected, our examination of MDA Space's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.
And what about other risks? Every company has them, and we've spotted 1 warning sign for MDA Space you should know about.
It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).
Valuation is complex, but we're here to simplify it.
Discover if MDA Space might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.
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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.