Getting In Cheap On Mold-Tek Packaging Limited (NSE:MOLDTKPAC) Is Unlikely

When close to half the companies in India have price-to-earnings ratios (or "P/E's") below 12x, you may consider Mold-Tek Packaging Limited (NSE:MOLDTKPAC) as a stock to potentially avoid with its 16.8x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Mold-Tek Packaging has been doing quite well of late. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Mold-Tek Packaging

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Mold-Tek Packaging.

Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as high as Mold-Tek Packaging's is when the company's growth is on track to outshine the market.

Retrospectively, the last year delivered an exceptional 17% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 55% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next year should bring plunging returns, with earnings decreasing 41% as estimated by the two analysts watching the company. The market is also set to see earnings decline 2.5% but the stock is shaping up to perform materially worse.

In light of this, it's odd that Mold-Tek Packaging's P/E sits above the majority of other companies. With earnings going quickly in reverse, it's not guaranteed that the P/E has found a floor yet. Maintaining these prices will be extremely difficult to achieve as the weak outlook is likely to weigh down the shares eventually.

What We Can Learn From Mold-Tek Packaging's P/E?

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.

We've established that Mold-Tek Packaging currently trades on a much higher than expected P/E since its earnings forecast is even worse than the struggling market. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings are unlikely to support such positive sentiment for long. In addition, we would be concerned whether the company can even maintain this level of performance under these tough market conditions. Unless the company's prospects improve markedly, it's very challenging to accept these prices as being reasonable.

You need to take note of risks, for example - Mold-Tek Packaging has 5 warning signs (and 1 which can't be ignored) we think you should know about.

Of course, you might also be able to find a better stock than Mold-Tek Packaging. So you may wish to see this free collection of other companies that sit on P/E's below 20x and have grown earnings strongly.

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This article by Simply Wall St is general in nature. 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.
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