Optimistic Investors Push Mincon Group plc (LON:MCON) Shares Up 26% But Growth Is Lacking

Mincon Group plc (LON:MCON) shares have had a really impressive month, gaining 26% after a shaky period beforehand. Looking further back, the 24% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Since its price has surged higher, given around half the companies in the United Kingdom have price-to-earnings ratios (or "P/E's") below 16x, you may consider Mincon Group as a stock to potentially avoid with its 22x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

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Recent times have been quite advantageous for Mincon Group as its earnings have been rising very briskly. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Mincon Group

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Mincon Group's earnings, revenue and cash flow.

Does Growth Match The High P/E?

In order to justify its P/E ratio, Mincon Group would need to produce impressive growth in excess of the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 218% last year. However, this wasn't enough as the latest three year period has seen a very unpleasant 66% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

In contrast to the company, the rest of the market is expected to grow by 21% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's alarming that Mincon Group's P/E sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

What We Can Learn From Mincon Group's P/E?

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

We've established that Mincon Group currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Mincon Group that you should be aware of.

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.