Investors Still Aren't Entirely Convinced By MSTC Limited's (NSE:MSTCLTD) Earnings Despite 32% Price Jump

Despite an already strong run, MSTC Limited (NSE:MSTCLTD) shares have been powering on, with a gain of 32% in the last thirty days. The annual gain comes to 111% following the latest surge, making investors sit up and take notice.

Even after such a large jump in price, given about half the companies in India have price-to-earnings ratios (or "P/E's") above 30x, you may still consider MSTC as an attractive investment with its 17.4x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

For instance, MSTC's receding earnings in recent times would have to be some food for thought. It might be that many expect the disappointing earnings performance to continue or accelerate, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

View our latest analysis for MSTC

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on MSTC will help you shine a light on its historical performance.

How Is MSTC's Growth Trending?

MSTC'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.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 9.9%. Still, the latest three year period has seen an excellent 256% overall rise in EPS, in spite of its unsatisfying short-term performance. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 26% shows it's noticeably more attractive on an annualised basis.

With this information, we find it odd that MSTC is trading at a P/E lower than the market. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

The Bottom Line On MSTC's P/E

The latest share price surge wasn't enough to lift MSTC's P/E close to the market median. 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.

We've established that MSTC currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. 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 1 warning sign for MSTC that you need to take into consideration.

If you're unsure about the strength of MSTC'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.