Why Investors Shouldn't Be Surprised By Major Drilling Group International Inc.'s (TSE:MDI) 25% Share Price Surge

Major Drilling Group International Inc. (TSE:MDI) shareholders are no doubt pleased to see that the share price has bounced 25% in the last month, although it is still struggling to make up recently lost ground. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 12% over that time.

Since its price has surged higher, given around half the companies in Canada have price-to-earnings ratios (or "P/E's") below 15x, you may consider Major Drilling Group International as a stock to potentially avoid with its 19.8x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

Our free stock report includes 1 warning sign investors should be aware of before investing in Major Drilling Group International. Read for free now.

Major Drilling Group International hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

See our latest analysis for Major Drilling Group International

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

Is There Enough Growth For Major Drilling Group International?

There's an inherent assumption that a company should outperform the market for P/E ratios like Major Drilling Group International's to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 45%. This has erased any of its gains during the last three years, with practically no change in EPS being achieved in total. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Turning to the outlook, the next year should generate growth of 81% as estimated by the four analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 21%, 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 Final Word

The large bounce in Major Drilling Group International's shares has lifted the company's P/E to a fairly high level. 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.

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. 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.

It is also worth noting that we have found 1 warning sign for Major Drilling Group International that you need to take into consideration.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.