MDA Space Ltd.'s (TSE:MDA) Stock Retreats 27% But Earnings Haven't Escaped The Attention Of Investors

Unfortunately for some shareholders, the MDA Space Ltd. (TSE:MDA) share price has dived 27% in the last thirty days, prolonging recent pain. The last month has meant the stock is now only up 4.8% during the last year.

In spite of the heavy fall in price, MDA Space may still be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 28.5x, since almost half of all companies in Canada have P/E ratios under 16x and even P/E's lower than 9x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

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MDA Space certainly has been doing a good job lately as it's been growing earnings more 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.

Check out our latest analysis for MDA Space

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

Does Growth Match The High P/E?

There's an inherent assumption that a company should far outperform the market for P/E ratios like MDA Space's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 137%. The strong recent performance means it was also able to grow EPS by 2,473% in total over the last three years. 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 should grow by 16% per annum over the next three years. Meanwhile, the rest of the market is forecast to only expand by 9.3% per year, which is noticeably less attractive.

In light of this, it's understandable that MDA Space's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

A significant share price dive has done very little to deflate MDA Space's very lofty P/E. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of MDA Space's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with MDA Space, and understanding 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.