With a price-to-earnings (or "P/E") ratio of 18.4x M M Forgings Limited (NSE:MMFL) may be sending bullish signals at the moment, given that almost half of all companies in India have P/E ratios greater than 30x and even P/E's higher than 55x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
Recent times have been advantageous for M M Forgings as its earnings have been rising faster than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. 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.
Check out our latest analysis for M M Forgings
Is There Any Growth For M M Forgings?
There's an inherent assumption that a company should underperform the market for P/E ratios like M M Forgings' to be considered reasonable.
If we review the last year of earnings growth, the company posted a terrific increase of 27%. The latest three year period has also seen an excellent 1,029% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Shifting to the future, estimates from the dual analysts covering the company suggest earnings should grow by 34% over the next year. That's shaping up to be materially higher than the 26% growth forecast for the broader market.
With this information, we find it odd that M M Forgings is trading at a P/E lower than the market. It looks like most investors are not convinced at all that the company can achieve future growth expectations.
The Key Takeaway
While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.
Our examination of M M Forgings' analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E anywhere near as much as we would have predicted. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. It appears many are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.
Having said that, be aware M M Forgings is showing 2 warning signs in our investment analysis, you should know about.
If you're unsure about the strength of M M Forgings' 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.
About NSEI:MMFL
Good value with adequate balance sheet.
