Slammed 28% Megatherm Induction Limited (NSE:MEGATHERM) Screens Well Here But There Might Be A Catch

Megatherm Induction Limited (NSE:MEGATHERM) shareholders won't be pleased to see that the share price has had a very rough month, dropping 28% and undoing the prior period's positive performance. Longer-term shareholders will rue the drop in the share price, since it's now virtually flat for the year after a promising few quarters.

After such a large drop in price, Megatherm Induction's price-to-earnings (or "P/E") ratio of 29.4x might make it look like a buy right now compared to the market in India, where around half of the companies have P/E ratios above 34x and even P/E's above 64x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

With earnings growth that's exceedingly strong of late, Megatherm Induction has been doing very well. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

View our latest analysis for Megatherm Induction

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Is There Any Growth For Megatherm Induction?

In order to justify its P/E ratio, Megatherm Induction would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered an exceptional 40% gain to the company's bottom line. Pleasingly, EPS has also lifted 389% 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.

Comparing that to the market, which is only predicted to deliver 25% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised earnings results.

In light of this, it's peculiar that Megatherm Induction's P/E sits below the majority of other companies. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

The Bottom Line On Megatherm Induction's P/E

Megatherm Induction's recently weak share price has pulled its P/E below most other companies. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of Megatherm Induction revealed its three-year earnings trends aren't contributing to its P/E anywhere near as much as we would have predicted, given they look better than current market expectations. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. At least price risks look to be very low if recent medium-term earnings trends continue, but investors seem to think future earnings could see a lot of volatility.

It is also worth noting that we have found 2 warning signs for Megatherm Induction (1 doesn't sit too well with us!) that you need to take into consideration.

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

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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.

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