After Leaping 29% Montauk Renewables, Inc. (NASDAQ:MNTK) Shares Are Not Flying Under The Radar

Montauk Renewables, Inc. (NASDAQ:MNTK) shares have had a really impressive month, gaining 29% after a shaky period beforehand. But the last month did very little to improve the 54% share price decline over the last year.

After such a large jump in price, Montauk Renewables may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 45.5x, since almost half of all companies in the United States have P/E ratios under 18x and even P/E's lower than 10x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

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Montauk Renewables could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. 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.

View our latest analysis for Montauk Renewables

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

How Is Montauk Renewables' Growth Trending?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 64%. As a result, earnings from three years ago have also fallen 14% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Shifting to the future, estimates from the three analysts covering the company suggest earnings should grow by 63% per annum over the next three years. That's shaping up to be materially higher than the 11% each year growth forecast for the broader market.

In light of this, it's understandable that Montauk Renewables' P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

The strong share price surge has got Montauk Renewables' P/E rushing to great heights as well. 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.

We've established that Montauk Renewables 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. It's hard to see the share price falling strongly in the near future under these circumstances.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Montauk Renewables that you should be aware of.

You might be able to find a better investment than Montauk Renewables. 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.