What You Can Learn From Macpower CNC Machines Limited's (NSE:MACPOWER) P/E After Its 31% Share Price Crash

The Macpower CNC Machines Limited (NSE:MACPOWER) share price has fared very poorly over the last month, falling by a substantial 31%. The last month has meant the stock is now only up 3.0% during the last year.

Although its price has dipped substantially, given around half the companies in India have price-to-earnings ratios (or "P/E's") below 27x, you may still consider Macpower CNC Machines as a stock to potentially avoid with its 34.5x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

With earnings growth that's exceedingly strong of late, Macpower CNC Machines has been doing very well. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Macpower CNC Machines

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Macpower CNC Machines' earnings, revenue and cash flow.

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

Macpower CNC Machines' P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 93% last year. Pleasingly, EPS has also lifted 173% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 25% shows it's noticeably more attractive on an annualised basis.

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

The Key Takeaway

Macpower CNC Machines' P/E hasn't come down all the way after its stock plunged. 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 Macpower CNC Machines revealed its three-year earnings trends are contributing to its high P/E, given they look better than current market expectations. Right now shareholders are comfortable with the P/E as they are quite confident earnings aren't under threat. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.

You should always think about risks. Case in point, we've spotted 2 warning signs for Macpower CNC Machines you should be aware of.

If these risks are making you reconsider your opinion on Macpower CNC Machines, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.