Mahamaya Steel Industries Limited (NSE:MAHASTEEL) Stock Rockets 36% As Investors Are Less Pessimistic Than Expected

The Mahamaya Steel Industries Limited (NSE:MAHASTEEL) share price has done very well over the last month, posting an excellent gain of 36%. The last 30 days bring the annual gain to a very sharp 50%.

Although its price has surged higher, there still wouldn't be many who think Mahamaya Steel Industries' price-to-earnings (or "P/E") ratio of 28.4x is worth a mention when the median P/E in India is similar at about 30x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

For instance, Mahamaya Steel Industries' receding earnings in recent times would have to be some food for thought. One possibility is that the P/E is moderate because investors think the company might still do enough to be in line with the broader market in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.

See our latest analysis for Mahamaya Steel Industries

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

Is There Some Growth For Mahamaya Steel Industries?

There's an inherent assumption that a company should be matching the market for P/E ratios like Mahamaya Steel Industries' to be considered reasonable.

Retrospectively, the last year delivered a frustrating 6.7% decrease to the company's bottom line. Unfortunately, that's brought it right back to where it started three years ago with EPS growth being virtually non-existent overall during that time. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

This is in contrast to the rest of the market, which is expected to grow by 25% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it interesting that Mahamaya Steel Industries is trading at a fairly similar P/E to the market. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as a continuation of recent earnings trends is likely to weigh down the shares eventually.

The Final Word

Its shares have lifted substantially and now Mahamaya Steel Industries' P/E is also back up to the market median. 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.

Our examination of Mahamaya Steel Industries revealed its three-year earnings trends aren't impacting its P/E as much as we would have predicted, given they look worse than current market expectations. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Before you take the next step, you should know about the 5 warning signs for Mahamaya Steel Industries (3 can't be ignored!) that we have uncovered.

You might be able to find a better investment than Mahamaya Steel Industries. 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.