Megaforce Company Limited's (GTSM:3294) 59% Price Boost Is Out Of Tune With Earnings

Megaforce Company Limited (GTSM:3294) shareholders would be excited to see that the share price has had a great month, posting a 59% gain and recovering from prior weakness. The annual gain comes to 168% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, Megaforce may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 43.9x, since almost half of all companies in Taiwan have P/E ratios under 20x and even P/E's lower than 14x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Megaforce certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. The P/E is probably high because investors think this strong 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.

View our latest analysis for Megaforce

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Is There Enough Growth For Megaforce?

In order to justify its P/E ratio, Megaforce would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered an exceptional 189% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen a very unpleasant 61% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

In contrast to the company, the rest of the market is expected to grow by 24% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

With this information, we find it concerning that Megaforce is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

What We Can Learn From Megaforce's P/E?

The strong share price surge has got Megaforce's 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.

Our examination of Megaforce revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

You need to take note of risks, for example - Megaforce has 3 warning signs (and 2 which can't be ignored) we think you should know about.

If you're unsure about the strength of Megaforce's 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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