With A 28% Price Drop For Major Drilling Group International Inc. (TSE:MDI) You'll Still Get What You Pay For

To the annoyance of some shareholders, Major Drilling Group International Inc. (TSE:MDI) shares are down a considerable 28% in the last month, which continues a horrid run for the company. The recent drop has obliterated the annual return, with the share price now down 5.0% over that longer period.

Even after such a large drop in price, given close to half the companies in Canada have price-to-earnings ratios (or "P/E's") below 9x, you may still consider Major Drilling Group International as a stock to potentially avoid with its 12.1x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Recent times have been advantageous for Major Drilling Group International 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.

See our latest analysis for Major Drilling Group International

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What Are Growth Metrics Telling Us About The High P/E?

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.

Retrospectively, the last year delivered an exceptional 422% gain to the company's bottom line. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Shifting to the future, estimates from the six analysts covering the company suggest earnings should grow by 44% over the next year. That's shaping up to be materially higher than the 16% growth forecast for the broader market.

In light of this, it's understandable that Major Drilling Group International'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

There's still some solid strength behind Major Drilling Group International's P/E, if not its share price lately. 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.

We've established that Major Drilling Group International maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. 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.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Major Drilling Group International with six simple checks on some of these key factors.

If these risks are making you reconsider your opinion on Major Drilling Group International, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.