Mahanagar Gas Limited's (NSE:MGL) Shares Bounce 35% But Its Business Still Trails The Market

Mahanagar Gas Limited (NSE:MGL) shares have had a really impressive month, gaining 35% after a shaky period beforehand. Looking back a bit further, it's encouraging to see the stock is up 62% in the last year.

In spite of the firm bounce in price, Mahanagar Gas' price-to-earnings (or "P/E") ratio of 13.5x might still make it look like a strong buy right now compared to the market in India, where around half of the companies have P/E ratios above 33x and even P/E's above 65x 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 so limited.

With earnings growth that's superior to most other companies of late, Mahanagar Gas has been doing relatively well. 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.

See our latest analysis for Mahanagar Gas

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Mahanagar Gas.

Is There Any Growth For Mahanagar Gas?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 62% last year. Pleasingly, EPS has also lifted 106% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 2.8% per annum as estimated by the analysts watching the company. Meanwhile, the broader market is forecast to expand by 22% per annum, which paints a poor picture.

In light of this, it's understandable that Mahanagar Gas' P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Bottom Line On Mahanagar Gas' P/E

Shares in Mahanagar Gas are going to need a lot more upward momentum to get the company's P/E out of its slump. 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.

As we suspected, our examination of Mahanagar Gas' analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

Having said that, be aware Mahanagar Gas is showing 2 warning signs in our investment analysis, and 1 of those can't be ignored.

You might be able to find a better investment than Mahanagar Gas. 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.

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