Market Participants Recognise Mayville Engineering Company, Inc.'s (NYSE:MEC) Earnings Pushing Shares 76% Higher

Mayville Engineering Company, Inc. (NYSE:MEC) shareholders would be excited to see that the share price has had a great month, posting a 76% gain and recovering from prior weakness. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 29% over that time.

Since its price has surged higher, Mayville Engineering Company may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 79.3x, since almost half of all companies in the United States have P/E ratios under 14x and even P/E's lower than 8x 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.

While the market has experienced earnings growth lately, Mayville Engineering Company's earnings have gone into reverse gear, which is not great. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Mayville Engineering Company

Keen to find out how analysts think Mayville Engineering Company's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Mayville Engineering Company's Growth Trending?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Mayville Engineering Company's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 61% decrease to the company's bottom line. At least EPS has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 713% over the next year. That's shaping up to be materially higher than the 7.2% growth forecast for the broader market.

With this information, we can see why Mayville Engineering Company is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

The strong share price surge has got Mayville Engineering Company's P/E rushing to great heights as well. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Mayville Engineering Company maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

Having said that, be aware Mayville Engineering Company is showing 2 warning signs in our investment analysis, you should know about.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20x).

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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.