Mortgage Advice Bureau (Holdings) plc (LON:MAB1) Looks Just Right With A 31% Price Jump

Mortgage Advice Bureau (Holdings) plc (LON:MAB1) shareholders would be excited to see that the share price has had a great month, posting a 31% gain and recovering from prior weakness. Notwithstanding the latest gain, the annual share price return of 5.5% isn't as impressive.

Since its price has surged higher, Mortgage Advice Bureau (Holdings)'s price-to-earnings (or "P/E") ratio of 32x might make it look like a strong sell right now compared to the market in the United Kingdom, where around half of the companies have P/E ratios below 15x and even P/E's below 9x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

We've discovered 1 warning sign about Mortgage Advice Bureau (Holdings). View them for free.

Recent times have been advantageous for Mortgage Advice Bureau (Holdings) 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.

View our latest analysis for Mortgage Advice Bureau (Holdings)

Want the full picture on analyst estimates for the company? Then our free report on Mortgage Advice Bureau (Holdings) will help you uncover what's on the horizon.

Is There Enough Growth For Mortgage Advice Bureau (Holdings)?

The only time you'd be truly comfortable seeing a P/E as steep as Mortgage Advice Bureau (Holdings)'s is when the company's growth is on track to outshine the market decidedly.

If we review the last year of earnings growth, the company posted a terrific increase of 17%. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 22% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 23% per annum as estimated by the four analysts watching the company. That's shaping up to be materially higher than the 16% each year growth forecast for the broader market.

With this information, we can see why Mortgage Advice Bureau (Holdings) 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 Final Word

Mortgage Advice Bureau (Holdings)'s P/E is flying high just like its stock has during the last month. 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 Mortgage Advice Bureau (Holdings)'s analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Mortgage Advice Bureau (Holdings), and understanding should be part of your investment process.

Of course, you might also be able to find a better stock than Mortgage Advice Bureau (Holdings). So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.