There's Reason For Concern Over Mahamaya Steel Industries Limited's (NSE:MAHASTEEL) Massive 26% Price Jump

Despite an already strong run, Mahamaya Steel Industries Limited (NSE:MAHASTEEL) shares have been powering on, with a gain of 26% in the last thirty days. The annual gain comes to 218% following the latest surge, making investors sit up and take notice.

After such a large jump in price, Mahamaya Steel Industries' price-to-earnings (or "P/E") ratio of 71x might make it look like a strong sell right now compared to the market in India, where around half of the companies have P/E ratios below 27x and even P/E's below 15x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

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Earnings have risen firmly for Mahamaya Steel Industries recently, which is pleasing to see. One possibility is that the P/E is high because investors think this respectable earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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.

How Is Mahamaya Steel Industries' Growth Trending?

The only time you'd be truly comfortable seeing a P/E as steep as Mahamaya Steel Industries' is when the company's growth is on track to outshine the market decidedly.

If we review the last year of earnings growth, the company posted a worthy increase of 13%. The latest three year period has also seen an excellent 40% overall rise in EPS, aided somewhat by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

This is in contrast to the rest of the market, which is expected to grow by 23% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it concerning that Mahamaya Steel Industries is trading at a P/E higher than the market. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Bottom Line On Mahamaya Steel Industries' P/E

The strong share price surge has got Mahamaya Steel Industries' P/E rushing to great heights as well. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Mahamaya Steel Industries currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You always need to take note of risks, for example - Mahamaya Steel Industries has 1 warning sign we think you should be aware of.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.