Earnings Working Against Mega Flex Plastics Limited's (NSE:MEGAFLEX) Share Price Following 30% Dive

Mega Flex Plastics Limited (NSE:MEGAFLEX) shareholders that were waiting for something to happen have been dealt a blow with a 30% share price drop in the last month. 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.

Although its price has dipped substantially, Mega Flex Plastics' price-to-earnings (or "P/E") ratio of 16.7x might still 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 28x and even P/E's above 54x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

We've found 21 US stocks that are forecast to pay a dividend yield of over 6% next year. See the full list for free.

Recent times have been quite advantageous for Mega Flex Plastics as its earnings have been rising very briskly. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. 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 Mega Flex Plastics

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

Is There Any Growth For Mega Flex Plastics?

There's an inherent assumption that a company should underperform the market for P/E ratios like Mega Flex Plastics' to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 122% last year. Still, incredibly EPS has fallen 16% in total from three years ago, which is quite disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

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

With this information, we are not surprised that Mega Flex Plastics is trading at a P/E lower than the market. However, we think shrinking earnings are unlikely to lead to a stable P/E over the longer term, which could set up shareholders for future disappointment. Even just maintaining these prices could be difficult to achieve as recent earnings trends are already weighing down the shares.

The Final Word

Mega Flex Plastics' P/E has taken a tumble along with its share price. 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 Mega Flex Plastics revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Mega Flex Plastics that you should be aware of.

If you're unsure about the strength of Mega Flex Plastics' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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

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.