Investors Appear Satisfied With Major Drilling Group International Inc.'s (TSE:MDI) Prospects As Shares Rocket 27%

The Major Drilling Group International Inc. (TSE:MDI) share price has done very well over the last month, posting an excellent gain of 27%. Looking back a bit further, it's encouraging to see the stock is up 38% in the last year.

Since its price has surged higher, Major Drilling Group International's price-to-earnings (or "P/E") ratio of 46.6x might make it look like a strong sell right now compared to the market in Canada, where around half of the companies have P/E ratios below 16x and even P/E's below 10x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

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While the market has experienced earnings growth lately, Major Drilling Group International's earnings have gone into reverse gear, which is not great. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Major Drilling Group International

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

Does Growth Match The High P/E?

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

Retrospectively, the last year delivered a frustrating 57% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 70% 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.

Turning to the outlook, the next three years should generate growth of 46% each year as estimated by the three analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 12% per year, which is noticeably less attractive.

In light of this, it's understandable that Major Drilling Group International's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

Major Drilling Group International's P/E is flying high just like its stock has during the last month. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of Major Drilling Group International'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. It's hard to see the share price falling strongly in the near future under these circumstances.

You always need to take note of risks, for example - Major Drilling Group International has 2 warning signs we think you should be aware of.

Of course, you might also be able to find a better stock than Major Drilling Group International. 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.