Why Investors Shouldn't Be Surprised By Mortgage Advice Bureau (Holdings) plc's (LON:MAB1) 37% Share Price Surge

Mortgage Advice Bureau (Holdings) plc (LON:MAB1) shareholders would be excited to see that the share price has had a great month, posting a 37% gain and recovering from prior weakness. While recent buyers may be laughing, long-term holders might not be as pleased since the recent gain only brings the stock back to where it started a year ago.

Since its price has surged higher, Mortgage Advice Bureau (Holdings) may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 45.9x, since almost half of all companies in the United Kingdom have P/E ratios under 16x and even P/E's lower than 9x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

While the market has experienced earnings growth lately, Mortgage Advice Bureau (Holdings)'s earnings have gone into reverse gear, which is not great. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Mortgage Advice Bureau (Holdings)

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Mortgage Advice Bureau (Holdings).

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

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.

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 2.3%. This means it has also seen a slide in earnings over the longer-term as EPS is down 38% in total over the last three years. 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 two analysts covering the company suggest earnings should grow by 25% per year over the next three years. With the market only predicted to deliver 14% each year, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Mortgage Advice Bureau (Holdings)'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.

What We Can Learn From Mortgage Advice Bureau (Holdings)'s P/E?

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.

We've established that Mortgage Advice Bureau (Holdings) 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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Mortgage Advice Bureau (Holdings), and understanding these should be part of your investment process.

If you're unsure about the strength of Mortgage Advice Bureau (Holdings)'s business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.