Improved Earnings Required Before MSTC Limited (NSE:MSTCLTD) Stock's 28% Jump Looks Justified

MSTC Limited (NSE:MSTCLTD) shares have had a really impressive month, gaining 28% after a shaky period beforehand. The last 30 days bring the annual gain to a very sharp 51%.

In spite of the firm bounce in price, MSTC may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 28.1x, since almost half of all companies in India have P/E ratios greater than 34x and even P/E's higher than 64x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

As an illustration, earnings have deteriorated at MSTC over the last year, which is not ideal at all. It might be that many expect the disappointing earnings performance to continue or accelerate, which has repressed the P/E. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

View our latest analysis for MSTC

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 MSTC's earnings, revenue and cash flow.

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

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

Retrospectively, the last year delivered a frustrating 15% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 31% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

This is in contrast to the rest of the market, which is expected to grow by 26% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we can see why MSTC is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

The Final Word

MSTC's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of MSTC revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 1 warning sign for MSTC you should know about.

You might be able to find a better investment than MSTC. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.