Subdued Growth No Barrier To ME Group International plc (LON:MEGP) With Shares Advancing 26%

ME Group International plc (LON:MEGP) shareholders are no doubt pleased to see that the share price has bounced 26% in the last month, although it is still struggling to make up recently lost ground. Looking back a bit further, it's encouraging to see the stock is up 31% in the last year.

Even after such a large jump in price, there still wouldn't be many who think ME Group International's price-to-earnings (or "P/E") ratio of 15x is worth a mention when the median P/E in the United Kingdom is similar at about 16x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

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There hasn't been much to differentiate ME Group International's and the market's earnings growth lately. It seems that many are expecting the mediocre earnings performance to persist, which has held the P/E back. If you like the company, you'd be hoping this can at least be maintained so that you could pick up some stock while it's not quite in favour.

See our latest analysis for ME Group International

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

Does Growth Match The P/E?

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

Retrospectively, the last year delivered a decent 7.2% gain to the company's bottom line. Pleasingly, EPS has also lifted 150% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 1.6% each year as estimated by the three analysts watching the company. That's not great when the rest of the market is expected to grow by 15% per annum.

With this information, we find it concerning that ME Group International is trading at a fairly similar P/E to the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as these declining earnings are likely to weigh on the share price eventually.

The Key Takeaway

ME Group International's stock has a lot of momentum behind it lately, which has brought its P/E level with the market. 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.

Our examination of ME Group International's analyst forecasts revealed that its outlook for shrinking earnings isn't impacting its P/E as much as we would have predicted. Right now we are uncomfortable with the P/E as the predicted future earnings are unlikely to support a more positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

It is also worth noting that we have found 1 warning sign for ME 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.