Improved Earnings Required Before M.T.I Wireless Edge Ltd. (LON:MWE) Stock's 28% Jump Looks Justified

M.T.I Wireless Edge Ltd. (LON:MWE) shares have had a really impressive month, gaining 28% after a shaky period beforehand. Unfortunately, despite the strong performance over the last month, the full year gain of 2.2% isn't as attractive.

In spite of the firm bounce in price, M.T.I Wireless Edge's price-to-earnings (or "P/E") ratio of 12.5x might still make it look like a buy right now compared to the market in the United Kingdom, where around half of the companies have P/E ratios above 17x and even P/E's above 30x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

With earnings growth that's superior to most other companies of late, M.T.I Wireless Edge has been doing relatively well. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

View our latest analysis for M.T.I Wireless Edge

Want the full picture on analyst estimates for the company? Then our free report on M.T.I Wireless Edge will help you uncover what's on the horizon.

Does Growth Match The Low P/E?

M.T.I Wireless Edge's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

Retrospectively, the last year delivered a decent 8.2% gain to the company's bottom line. EPS has also lifted 18% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Turning to the outlook, the next year should bring diminished returns, with earnings decreasing 1.8% as estimated by the two analysts watching the company. That's not great when the rest of the market is expected to grow by 18%.

With this information, we are not surprised that M.T.I Wireless Edge is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Final Word

Despite M.T.I Wireless Edge's shares building up a head of steam, its P/E still lags most other companies. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of M.T.I Wireless Edge's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

Having said that, be aware M.T.I Wireless Edge is showing 2 warning signs in our investment analysis, you should know about.

If these risks are making you reconsider your opinion on M.T.I Wireless Edge, explore our interactive list of high quality stocks to get an idea of what else is out there.

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.