Morgan Advanced Materials plc (LON:MGAM) Not Flying Under The Radar

When close to half the companies in the United Kingdom have price-to-earnings ratios (or "P/E's") below 16x, you may consider Morgan Advanced Materials plc (LON:MGAM) as a stock to potentially avoid with its 23.1x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

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Morgan Advanced Materials hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

See our latest analysis for Morgan Advanced Materials

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

Is There Enough Growth For Morgan Advanced Materials?

The only time you'd be truly comfortable seeing a P/E as high as Morgan Advanced Materials' is when the company's growth is on track to outshine the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 60%. As a result, earnings from three years ago have also fallen 61% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the seven analysts covering the company suggest earnings should grow by 34% per annum over the next three years. Meanwhile, the rest of the market is forecast to only expand by 15% per annum, which is noticeably less attractive.

With this information, we can see why Morgan Advanced Materials is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Morgan Advanced Materials' P/E

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Morgan Advanced Materials 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. It's hard to see the share price falling strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 4 warning signs for Morgan Advanced Materials you should be aware of, and 1 of them is potentially serious.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and 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.